Geithner

The market value of your house is down 20 to 30 percent from its peak and could have further still to go. Jobs are scarce and the idea that home values will rise again seems remote. But this, too, shall pass (yes, your home value will eventually recover). And I can tell you exactly why -- psychology.

The good news is that for all the economic pain and suffering, we've probably just bought ourselves, as a people, 50 years of immunity to economic depression. The bad news is that this immunity has nothing at all to do with house prices, public policy, Bernanke, Dodd, Geithner, or Obama, much less Paulson or Bush. It would have happened anyway.

Not long ago I wrote a post about a National Bureau of Economic Research study that blamed the Great Recession on a bank panic rather than that usual suspect, the sub-prime mortgage crisis. There was a sub-prime crisis, sure, but it was just the catalyst for the much more damaging bank panic that followed.

All this relates back to a little-noticed structural change in the U.S. banking system where Nixon-era deregulation led to the growth of money market funds that killed the savings deposits that had traditionally backed most bank lending. Rising to replace savings (and make a lot more profit) was loan securitization and REPO collateralized inter-bank lending enabled by Reagan-era deregulation. The Great Recession was caused by the banks all losing faith in each other, with commercial lending grinding to a halt as it continues to in many places even today.

Heck of a story, eh? Now that I had a better understanding of the actual crisis, I immediately began to wonder how we can avoid it happening again?

We can't.

A housing smackdown is coming to Capitol Hill.

Rep. Barney Frank (D-Mass.) has set March 2nd as the date for the first hearing on the future of housing finance. Though sweeping in scope, the review will surely center on the uncertain future of Fannie Mae and Freddie Mac.

It won't be an easy ride for the embattled Fannie and Freddie. Frank, chairman of the House Financial Services Committee, recently declared that the two troubled mortgage giants should be wiped out and replaced, according to news outlets including Bloomberg News. Republicans, too, are calling for drastic changes.

The high-stakes hearings are likely to shape the role of the federal government in the housing market going forward. Considering that almost every home loan written today is guaranteed by Fannie, Freddie, or the Federal Housing Administration, Congress is about to decide nothing less than the future of housing.

A perfect storm is coming in the housing market. Millions of mortgages are in default or foreclosure, mortgage rates are firming and mortgage issuers are significantly raising both borrower requirements and fees. The Federal Reserve, which has been propping up the housing market by buying mortgage-backed securities, says it plans to stop buying at the end of March. The $8000 first-time and $6500 homebuyer tax credits are scheduled to end for mortgages that close after June. Meanwhile stocks are up and economists talk about the recession being technically over, which might be true, but for how long?

We're in big trouble and, so far at least, nobody seems to have a plan.

And then there's the mystery of Fannie Mae and Freddie Mac, those Government Sponsored Entities that House Finance Committee chairman Barney Frank says have effectively become policy tools of the federal government and ought to be reorganized to reflect that. Yet, in the Fiscal Year 2011 federal budget released this morning there is no sign of Fannie and Freddie's combined $7.2 trillion total corporate debt and mortgage obligations.

"What the Hell is going on? " I asked my friend Jack, the world's smartest mortgage banker.