Simple Rustico, because the disparity between the house price growth and income growth is too severe in the bubble regions. Second, history has shown what happens in credit driven asset bubbles: Deflation. That is what happened in the Great Depression. We will not have a Weimer style hyperinflation here with the use of printing presses. Once asset values get beyond the ablility of the borrowers to service the related debt, then the assets value comes into question and becomes impaired. The assets pledged are no longer worth what they once were and the loans backing them become suspect. Credit tightens severely and lending institions don’t trust each other because they don’t know who is insolvent and who isn’t. The Fed can loosen rates all it wants, but liquidity will not help and insolvency problem at either the homedebtor level or the institutional level.
