Those sinking in the wake of the real estate plunge get different treatment. For the overall economy, it makes sense.
Home prices in the United States are down about 18 percent. Some predict the eventual price decline will reach 30 percent. Since the total value of houses was approximately $20 trillion, the loss in underlying value could reach $6 trillion if the gloomy forecasts prove correct.
Of course, the actual loss will probably be far less than that $6 trillion. But it will be huge – maybe $1 trillion, speculates L. Randall Wray, a senior scholar at the Levy Economic Institute in Annandale-on-Hudson, N.Y.
That hints at the order of magnitude of the potential losses facing Washington with the latest plan for creation of some sort of federal authority to buy troubled mortgages and mortgage-backed securities. Such losses would far exceed the losses of the Resolution Trust Corp., created to clean up the savings-and-loan crisis of the 1980s.
The earlier emergency negotiations in New York hung in part on the issue of who takes the present losses. Is it Uncle Sam? Or should shareholders of troubled firms suffer the losses through bankruptcy – or perhaps sale of bad assets to a new rescue agency at sharp losses? These shareholders, by the way, include pension funds and mutual funds relevant to millions of people.
"The problem is that this financial crisis is spreading through nearly every kind of financial liability – and it is not going to stop," warns Mr. Wray.
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