Interesting to watch the financial guru's thrash about in relative surprise at recent developments in the credit market.  Greenspan appeared before a congressional committee this morning and feigned his great surprise at the collapse of free market principals in regards to the credit markets and real estate.  Many of the current problems are a direct result of his direction as Federal Reserve Chairman.

But what is at the heart of the problem?  Why will the federal government surely fail if it doesn't address this issue now.  The big issue is the real estate market!!  It's been the case since 2007, and will continue to be the case for the immediate future.

The reason banks cannot determine value is that real estate is in a deflationary spiral.  You now are to the point that even borrowers who can make their mortgage payments are now abandoning their loans because of their depreciating home values.  This vicious cycle is out of control at present, and unless checked by government may in fact destroy our economy for many years.

I mentioned it in an earlier post, but the answer to any federal bailout is making the banks and homeowners responsible.  "One possible solution to this mortgage mess"

The big problem right now is that homeowners need to understand that their homes are not worthless.  The reality that these homes cost hundreds of thousands of dollars to construct, and that eventually when things settle out in the credit market's, that their property will then begin appreciating once again.  The problem is that emotionally people feel that they are all alone, whereas the banks are receiving bailout cash from the federal government!

Until we assure home owners that the government is concerned about their welfare as well, then we're not going to see this crisis abate.  I again wish to restate, we need to help home owners and banks right now. But just giving either party cold hard cash is a big mistake.  We need to react to the depreciation of asset values, and that's by checking the free falling market values.

I also like the goverment offering tax incentives to more then first time home buyers.  Anyone in 2009 who buys a home should get a $7500 dollar tax credit (not loan).  This of course would spur purchases from those sitting it out at this juncture, or those whom were forced to move in with family in 2007-2008, and perhaps they would be encouraged to get back into the market.

If we're going to plug holes in the dam, then we better make sure we're plugging the correct holes.