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Last March, George Akerlof told me that in his view it was time for Fannie Mae and Freddie Mac to start large-scale borrowing from the Treasury and for them to buy up (conforming) mortgages at market prices until interest rates were back at "normal" levels. That was the best way to fix the macroeconomy. And once Fannie Mae and Freddie Mac own all the mortgages the government can rewrite their terms with an eye on the general welfare.

He was right then. And I think it is still a very good idea today:

Alan Rappaport: Financial Times: US home prices fall at record pace: Home prices in big US cities fell at a record 18.5 per cent in the year to December as the stricken housing market showed no signs of bottoming out amid slumping sales and rising foreclosures. The drop followed an 18.2 per cent year-on-year decline in the prior month, itself a record, as no major city was spared, according to the closely watched Case-Shiller index released on Tuesday. At the same time, US consumer confidence fell to a new low in February, sinking to 25 from 37.4 the prior month.

The cities facing the sharpest declines from the previous month in December were Phoenix, Las Vegas and Minneapolis. Bright notes were Boston, Denver and New York, which notched relatively small declines. “The mix of a sharply deteriorating labour market, associated weakness in personal income; broader negative wealth effects from other asset classes; a massive overhang of actual and potential supply; and, troubled credit availability, are swamping the record affordability measures,” said Alan Ruskin, strategist at RBS Greenwich Capital. “Cheap just does not do it.” December was the 29th consecutive month that the index, published by Standard and Poor’s, declined. Home prices have fallen to levels last seen during the third quarter of 2003. “The broad downturn in the residential real estate market continues,” said David Blitzer, chairman of the index committee at Standard & Poor’s. “Most of the nation appears to remain on a downward path.”

Since the US housing market peaked in July 2006, the home price index has fallen by 26.7 per cent. In the seven years prior to its peak, the index had jumped by 155 per cent and economists predict that prices will continue to fall because of a massive overhang in the market. Joshua Shapiro, chief US economist at MFR predicts that home prices are one-half to two-thirds of the way through the ultimate total decline in this cycle. “Declines in home values of 2 per cent are costing U.S. households some $370bn per month, which helps explain why people are miserable,” said Ian Sheperdson, chief US economist at High Frequency Economics.

The Conference Board confidence index said on Tuesday that consumers felt worse about current conditions in February. Of the 5,000 US households queried, 51.1 per cent said that current conditions had worsened, up from 47.9 per cent in January. Consumers are also feeling much worse about the state of the labour market and have renewed fears about inflation. “Increasing concerns about business conditions, employment and earnings have further sapped confidence and driven expectations to their lowest level ever,” said Lynn Franco, director of The Conference Board’s consumer research centre.