Mark MacKenzie

Not since 2001 has the GDP contracted by this much in one quarter, so now what?

The truth is, one negative quarter by itself is not such a big deal. We had a contraction in GDP as recently as the 4th quarter of 2007.

What does matter is if the trend continues and how deep it goes. This is the real concern.

We could be entering a unique recession, not since the 4th quarter of 1990 and 1st quarter of 1991 have we seen back to back negative quarters. But more interesting, the effective Federal Funds rate in October of 1990 was 8.11%. Over the next two years, in response to a struggling economy, the effective funds rate was lowered to 3.10% in October of 1992. This was a very aggressive monetary easing policy.

Well, here we are in October of 2008 and the Federal funds rate was just slashed to 1%. Where do we go from here? How do we dig ourselves out of this?

If you want to look at something very discouraging, take a look at Japan's "lost decade" during the 1990s. Over that decade the speculation bubble bursted for both the stock market and the real estate market. Credit that was once in abundance, became tight. Unemployment rates rose.

Additionally, the Japanese Central bank lowered interest rates to zero. This had virtually no affect on stimulating the economy.

And according to Wikipedia, "Correcting the credit problem became even more difficult as the government began to subsidize failing banks and businesses, creating many so-called zombie businesses".

Does this sound familiar?

The difference between the Japanese economy and our economy was that for Japan, these things didn't all happen at once as we are seeing in the U.S. today.

I bring all of this up to make a point that while I don't believe we are going to see a great depression that was characterized by runs on the banks, bank failures, and 25% unemployment, I also don't believe that conventional methods of monetary and fiscal policy will be able to help us avoid a long and deep recession.

Japan already tried conventional monetary and fiscal policy - it didn't work. It may have prevented a depression, but I think we need to have more ambitious goals than just avoiding a disaster.

I detail my housing stimulus and fiscal policy plan here: www.ItsTheHousingMarketStupid.com

As expected, the Fed slashed the Federal Funds rate 50 basis points to 1% today - the lowest rate in four years.

At face value this may seem like great news for the credit markets and potentially for mortgage rates, but my skepticism is that Bernanke is exhausting all of his options on what could be a potentially long and deep recession.

Ordinarily, when you go back through history, during times of a recession, the Fed was able to cut rates.

Well, as of today, we are not officially in a recession. Yes, the real GDP numbers coming out tomorrow may be negative, but that is only one quarter of negative growth, we could be facing several quarters of negative growth. In other words, there is the potential, that this recession is just getting started. I don't think I am being pessimistic about this, just realistic based on the events of the past several weeks.

If I am correct about the US economy entering a prolonged recession, it does beg the question how we are going to get out of it if the Fed has already used all of their ammunition.

Of course what is most alarming about this potential recession we are entering is that we have not seen a housing market this weak in terms of home price declines since the great depression. Ordinarily, the housing market helps pull the rest of the economy out of a rut as homes are built, jobs are created, homeowner equity increases, and consumer spending rises as a result of this. In other words, usually the Fed can jump start the housing market by cutting the rate. That is not going to happen this time around because they Fed funds rate doesn't have the downward mobility this time. It's already at 1%.

All of this brings me back to the fact that the Government needs to use a new fiscal policy to jump start the engine of the US economy, the housing market.

I detail this new fiscal policy in my new book, "It's The Housing Market, Stupid!"

According to a CNBC.com article by Kenneth Stier yesterday, foreclosures were up 71% in the 3rd quarter.

This is more than 8,500 homes a day that are going into foreclosure throughout the country, according to RealtyTrac data.

There are several reasons why this is happeneing and why what the government is doing is not going to fix the problem.

First of all, the systemic reason behind foreclosures is that too many Americans took out adjustable rate mortgages. What we are seeing right now is a flood of subprime resets. We will be seeing just as many alt-a, prime ARMs, and option AMRs resetting through 2011 and 2012.

When you combine ARMs with declining property values you get foreclosures. This is not rocket science. If an owner has an ARM and they can't refinance because the property is worth less than what they bought it for, they will lose their home.

The reason Washington's efforts are not working is because they are trying to renegotiate loan terms with loan servicers. Loan servicers in most cases are not able to negotiate these loan terms because they don't own the loan, an investor does. Maybe that investor is a bank in Japan or Iceland - you can see why it would be difficult to renegotiate loan terms under these circumstances.

Additionally, even if the investor was able to renegotiate the loan term, there is still no guarantee that they would be willing to.

Further more, according to the CNBC.com article, "RealtyTrac's Sharga says more than a third of work-outs end up back in default within three months, reducing these efforts to just delaying the inevitable."

What needs to be addressed is the reason why property values are going down, and that is because there are too many homes for sale and not enough demand for them. Until this excess supply of homes gets sold, we are going to continue to see this problem play out in neighborhoods all across America.

The longer Congress waits to get out ahead of this crisis, the harder it will be to stem the fallout out from it.

And by the way, for those of you keeping score, like it or not, Washington is on the hook for nearly $6 trillion worth of mortgage debt ever since they took over Fannie and Freddie in September.

I do propose a solution to this problem on this web site: www.HousingStimulusPlan.org

And the best part is, it does not involve a bailout.

Finally after spending the last two weeks locked in my office, I have finished my newest book, "It's The Housing Market, Stupid!", and have sent it off to the printer.

After a year of watching Congress stand by and do nothing while this titanic financial storm has been bearing down on our banking, financial, and housing infrastructure since of August of 2007, I decided to finally do something, anything, about it.

The book reveals the fact that while the government can spend as much money as they want securing bank's balance sheets and bailing out Wall St. companies that have made bad bets, in other words patching the broken levee system, ultimately none of this matters until property values get some traction.

What it really boils down to is the fact that there are too many homes for sale and not enough demand for them. Specifically, there are over 1 million too many homes for sale. The city is under water and is uninhabitable. This imbalance is causing downward pressure on home values and is making refinancing ARM's very difficult.

The big idea that I propose in the book is a true housing stimulus plan that would provide a real tax incentive for Americans to invest in real estate.

The goal is to sell the excess of 1 million homes within 1 year.

Washington is trying to patch the levees that have been breached. But in the mean time, the city is under water. They haven't realized that they can't fix the levee system until the water is pumped out of the city. And they have given every indication that are going to wait for the water to evaporate, rather than pump it out.

What is dangerous about waiting this thing out is that mortgage rates are already near historic lows and home ownership is near all time highs. The Fed has already used all of their magic tricks to stimulate the housing and mortgage markets and it has not worked. Additionally, our economy is now entering what could be a long and deep recession. In other words, unless the government acts with a new fiscal policy in regards to the real estate market, things could get worse before they get better.

If you are familiar with teleseminars and online marketing you probably know who Alex Mandossian is.

In the event you don't know who Alex Mandossian is, he is the guy that has interviewed several New York Times and other best selling authors including Donald Trump, Stephen Covey, Stephen M.R. Covey, Timothy Ferris, Jack Canfield, Kendra Todd (The Apprentice), and Harvey Mackay to name just a few of his guests.

In June of this year he did an interview with me that helped launch the Marketopoly book to #1 on amazon.com for real estate and investment books.

I wanted to make a post about this interview as well as include a link to listen to it because now more than ever, the Marketopoly book reveals the secrets to making smart investment decisions in a changing market.

What it really boils down to is understanding the ongoing relationship between supply and demand, also known as the month's supply of housing. It is this relationship that will reveal what markets are still appreciating, which ones have hit a bottom and are positioned for a rebound, and which ones will continue to lose value at least in the short term. It is the leading indicator of future property values. Unlike past appreciation which is a trailing indicator. Past appreciation reveals what happened last year, but gives little or no indication as to what may happen this year or next.

Anyways, here is the link to listen in about the Marketopoly book and making smart real estate investments during a changing market: http://www.realestateplanning.biz/mandossian.html