The Effects of a Declining Housing Market on the U.S. Economy
by Dimitri B. Papadimitriou, Greg Hannsgen , Gennaro Zezza

Longstanding speculation about the likelihood of a housing market collapse has given way in the past few months to consideration of just how far the housing market will fall and how much damage the debacle will inflict on the economy. In this paper, we discuss recent developments related to the housing market; econometrically assess the magnitude of the impact of housing price decreases on real private expenditure; assess the importance of new types of mortgages and mortgage-related securities; and briefly analyze possible policy responses.

Moreover, the Fed must be ready to step in as a lender of last resort should major financial institutions falter. In the current situation, pension funds, with their vast direct and indirect mortgage-related investments, may be as exposed to danger as banks. Pensions are backed with a separate bailout fund (which, at present, is also in jeopardy), not by bank regulators. The pension system is already failing millions of retirees, and many pension funds are not financially sound even now.

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