James Howard Kunstler has these words of wisdom to share about the F & F implosions:

"There's a particular moment known to all Baby Boomers when Wile E. Coyote, in a rapture of over-reaching, has run past the edge of the mesa and, still licking his chops and rubbing his front paws in anticipation of fricasseed roadrunner, discovers that he is suspended in thin air by nothing more than momentum. Grin becomes chagrin. He turns a nauseating shade of green, and drops, whistling, back to earth thousands of feet below, with a distant, dismal, barely audible thud at the end of his journey. We are Wile E. Coyote Nation.
Is there anyone in the known universe who thinks that the US financial system is not fifty feet beyond the edge of the mesa of credibility?"

It goes without saying that cleaning up this mess will involve picking between several bad outcomes.

If we become major shareholders of F & F, we suddenly come into possession of $770 billion worth of garbage (all those subprime and Alt-A mortgages that will never be repaid). Do we foreclose on the 'owners' leaving us with all those future slums, I mean property? Do we throw all this unwanted housing onto the market at fire sale prices, thus causing an even greater decline in the value of homes and putting even more 'homeowners' under water? Do we just continue the charade that some day, somehow, they'll be repaid, thus leaving the housing market as a festering, sick sector for decades? Do we 'pay off' the mortgages with a huge injection of cash, courtesy of the Fed, thus guaranteeing that nobody, but nobody will want to hold any US bonds?

Ah, the wonderful choices! A few more bargains like this and... well, I'll leave it to your imagination how to fill in the blanks.

and so will we. Home prices will fall back to what they should have been all along and revert to the mean. This happens in all markets. It would be morally wrong for the government to bail out the irresponsible at the expense of the responsible, to dilute the dollar at the expense of the entire economy in order to prop up still inflated housing prices. Houses should be homes, not speculaltion or ATM machines. Banks should (and will) start being more careful about who they lend to. This will happen despite the F&F bailouts. The jig is up. Ahab full stop.

"Home prices will fall back to what they should have been all along and revert to the mean"

What mean would that be? I remember (even though you probably don't) that I bought a new car for around $1800 and both a 12-oz bottle of Pepsi and a cup of coffee for a nickle. Gasoline was 18-cents a gallon and cigarettes were 18-cents a pack (and I suspect there was more tobacco in a cigarette then). Bread was 25-cents for a pound loaf and ground beef (ground while you watched) was 25-cents a pound. It may be that consistent lies about the real level of inflation has led us to a point where housing appears to be way out of line with inflation, although from a different point of view they seem much less out of line with the prices of familiar products.

Well Phil, you're talking about inflation.

Home prices have risen WELL ABOVE inflation, c/o our friends in government.

The current housing bubble started with the dot-com bust started, so if you want to find a "mean," go back to, oh, say '98 or '97. Find the value of a house then. Plug it into a CPI calculator (city-specific metrics are available) and adjust the value of the property for 2008. Guaranteed it's nowhere near what the asking price is, even in this, the June of homeowners' discontent.

Robert Shiller and others have drawn trend lines for housing prices. As Eastheimer says, housing really got into Bubble territory on Bush's watch--with the apparent blessings of Alan Greenspan, I might add. Dod you never take the roller coaster I C&P'ed to Bottom Line?

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"Do we 'pay off' the mortgages with a huge injection of cash, courtesy of the Fed, thus guaranteeing that nobody, but nobody will want to hold any US bonds?" or Do we once again prove that government bonds and bills are still the safest investment in the world?

Rev . . . what other gov in the world guarantees their bonds. If the US defaults then we have aworld crisis today.

If was expected that Feddie, Fannie, and the FHA would be buying up these mortgages from lenders. It is also expected that those banks making bad loans will get those loans returned to them for further work. The cost to rescue Fannie and Freddie is $80 billion as compared to how much spent in Iraq and how much given to Israel?

Let's see what Nouriel Roubini's point is; since he was one of the first economists to accurately predict the insolvency of Fannie and Freddie.

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First notice that, as discussed previously in this column, the farce that Fannie and Freddie were “private sector" firms was obviously a farce as investors always expected that the liabilities of the two GSEs would be eventually backed by the U.S. government. And in spite of the decade long rhetoric by Fed, Treasury, the Bush administration, conservative government-bashing hawks and a slew of other regulators that Fannie and Freddie were private firms, that investors should not assume that they would be bailed out if these firms turn out to be insolvent and that the moral hazard deriving from perceptions of an implicit guarantee should be stomped as hard as possible, the reality was different: these were effectively public institutions – not private ones - used by the government (especially this administration) to pursue public policy goals. The hawkish rhetoric about the “moral hazard” the from implicit guarantees that Greenspan, Bernanke, Paulson, Bush and the administration peddled for eight years was thrown out of the window the moment the housing and mortgage bust started. Instead, for the last few months the GSEs – that were already bleeding and becoming insolvent on their own portfolio – have been used by the government to back stop the mortgage markets: their portfolio limits were raised, their regulatory capital was reduced and the limits to what conforming mortgages (that the GSE can repackage/insure) are were raised from $420k to over $720k. So much for barking in public about “moral hazard” and then going ahead and using already distressed GSEs to bail out the mortgage market and make them even more insolvent. Now this “the emperor has no clothes” farce has been revealed to be what it always was: a high-flatulin “moral hazard” farcical rhetoric with zero substance and credibility.

Translation: wink, wink, nudge, nudge.