If the financial markets can predict where and when house prices will stabilize, then credit conditions can quickly return to normal, the economy can expand and house prices will indeed stabilize.
But if the financial markets remain uncertain about when the decline in house prices will end, then fear will tighten credit even further, which would strangle the housing market and generate even more fear.
We have nothing to fear but fear itself, but fear itself can be pretty scary.
Markets have never been able to predict where and when any down market will stabilize. (If they could, it wouldn’t be a down market, now, would it?) So if what Alex is saying is true, then things are going to get "pretty scary". And yes, that’s happy talk, by Barry’s standards.
Am I guilty of selective quotation here? Maybe, but note Alex’s own opinion of himself:
I am more optimistic than Paul Krugman, who thinks that we may have slipped into the state where no prophecy can bring us back to a good equilibrium, but I’m not that much more optimistic.
Personally, I’ve been having difficulty remembering, over the past couple of days, that this finance/credit crunch is somehow all about housing and mortgages. When people like Krugman say that banks are insolvent, they mean that mortgage-backed assets have fallen so far in value that the banks’ total assets are now worth less than the total of their liabilities. I’m just hoping the liquidity crisis has passed, so that we can get back to old-fashioned things like worrying about solvency.