Let house prices fall

The valuation of mortgage backed securities depends on the prices of the underlying assets, the houses. But if the housing markets wont clear, then no one knows how to value the mortgage backed securities, so no one trades. The result is recession.

If this is the problem, the solution is obvious:

The understandable impulse to minimize foreclosures should not be a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today's homeowners makes little sense if it penalizes tomorrow's homeowners. An unstoppable free-fall of prices seems unlikely. Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices