Will the Housing Crisis Destroy America?

America faces ever-worsening financial policy decisions. One of them is worth $5 trillion: Should the mortgage guarantees of the semi-governmental Fannie Mae and Freddie Mac corporations be honored?

In view of a persistently weak housing market with ever-declining house prices, that’s a lot of money that would be needed to bail out Fannie and Freddie. It would increase America’s total debt from $39 trillion to around $44 trillion.

There has never been such a steep decline and so persistent a slump in home prices and construction in the United States. The bubble began to burst in 2007, and the collapse has not yet stopped. Massive and continuing layoffs in America have resulted in a situation where many young families who would like to get a loan for a house are no longer able to do so.

In addition, those who already built or bought a house and were in the process of paying off the mortgage can no longer afford to do so. They lose not only their home, but also all their savings.

Then there are those who borrowed against the equity in their paid-off mortgages so they could buy other things, such as sport utility vehicles (SUVs). Those mortgages have also become too expensive in the wake of the financial crisis for the people to afford them. In cases like that, they lose not only the SUV, but also the house they had owned free and clear.

In total, millions of mortgages went bust. That, in turn, resulted in a glut of repossessed houses on the market that can be purchased for ridiculously low prices in many areas of the country; that, too, has helped rid the housing market of buyers. Banks generally don’t sell these repossessed houses, because they will lose too much of their own money. 110 banks have already gone under in the U.S., largely because of this problem.

In some states, like Ohio, 30 percent of all homes are currently bank-owned. In brief, America has a big problem with mortgage bankruptcies and insufficient new construction.

A note for those not overly familiar with the United States: Couples have traditionally built or bought new houses; only an insignificant number of Americans rent their homes. That was made possible partly by low house prices. A typical new American home is of wood construction and has no basement. Extensive insulation and weatherproofing is almost unheard of. So a new house in the United States costs perhaps only 30 to 40 percent as much as a German brick-and-stone dwelling. That worked to the advantage of American society as long as things were going well. Now, America’s industrial base has been so weakened and the entire economy made so dependent on financial services that there aren’t enough good-paying jobs to permit a young couple to afford a new home.

And that has led to the current situation where the number of mortgage defaults is so great that it affects the entire American economy. In theory, the government can now renew the guarantees made by Fannie and Freddie and take on responsibility for them itself. But that increases the public debt without actually doing much to help the bankrupt individuals.

The alternative is to let both of them go bankrupt, which would result in a complete implosion of the financial system — an option that can’t be seriously considered.

The only realistic option is to renew the Fannie and Freddie guarantees (with formal limits), even if that means accepting a swelling of the national debt.

Then the only thing people can do is pray that investors don’t notice that their liability far and away exceeds the performance of an economy that’s on the hook for all of it. If they do notice, it will mark the beginning of a run on the dollar and U.S. treasury bonds, and the end of the United States as a superpower.