Pushing Fed Chair Bernanke to act more aggressively

Has Ben Bernanke been too timid addressing falling home prices and a paralysis in the mortgage industry? It depends on whether or not home prices have further to fall and if a recession will be more severe than the last two (to which an increasing number of economists are answering "yes."). From an opinion piece by David Wessell in the WSJ (as well as a video):

If home prices are near a bottom, then the Fed -- and its allies in the White House and Congress -- probably have deployed enough forces to prevent a deep, prolonged recession. But if those prices still have a long way to fall, then the Committee to Save the World (Version 2.0) -- Mr. Bernanke and Treasury Secretary Henry Paulson, in place of predecessors Alan Greenspan, Robert Rubin and Lawrence Summers -- is going to need heavy artillery and air support...

Falling house prices aren't the U.S. economy's only challenge, of course, just the biggest one.

It isn't just that new-home construction is -- or used to be -- an important industry and employer. It's that houses are American families' single biggest financial asset. A persistent decline in their value will depress both Americans' wealth and their spirits...

So, as Merrill Lynch economist David Rosenberg asked in a commentary this week: "Is the worst over for the housing market?" Replying to his own question with refreshing, perhaps courageous, certainty, he said: "The answer is no."

Home builders already have cut new-home construction to an annual rate of one million units. That's back to levels last seen in May 1991, and far below what builders -- and the Fed -- had anticipated would be necessary to restore the balance of supply and demand. Yet the backlog of unsold houses and condos, measured against the monthly pace of sales, continues to climb. And that's despite the fact that the median price of a new home -- now at $219,200 -- has fallen to where it was three years ago.

Mr. Rosenberg predicts housing construction will have to slow to a 700,000 annual pace before the market stabilizes.

Meanwhile, the S&P/Case-Shiller index of house prices in 20 metropolitan markets fell another 2.1% in November (the most-recent data available) for the 16th month in a row. It was down nearly 8% from a year earlier.

Prices in all 20 markets are now dropping. And only Portland, Ore.; Charlotte, N.C., and Seattle are still up for the year. Mr. Rosenberg is betting on another 20% decline or more over the next couple of years.

Ouch. The looming recession, if it arrives, isn't likely to be as mild as the recessions of 1990-91 or 2001. In a new Wall Street Journal survey, forecasters give 40% odds it would be worse than the previous two...

Another three or four months like the past one, and Mr. Bernanke and Mr. Paulson will be thinking seriously about aggressive proposals that -- for now -- are deemed too radical. Like creating a federally funded outfit to buy mortgages that are in or near default and refinance them at easier terms so the borrowers can keep their homes, as Senate Banking Committee Chairman Christopher Dodd is already suggesting.