Kass: Housing Red Ink Could Spell Recession

During that period, unprecedented land and housing speculation followed the erosion in lending standards that were a byproduct of the deregulation of the savings and loan industry and the liquidity introduced by Michael Milken's Drexel Burnham, which brought an unprecedented increase in takeover activity.

Ultimately, the economic progress of the early- and mid-1980s gave way to an implosion in the high-yield debt markets, an economic downturn and a horrific housing depression -- and the loss of the previous decade's liquidity. In the early 1990s, the economic contraction was severe in both magnitude and duration (continuing for three years), even though the federal funds rate was reduced by 500 basis points to 3% and stayed there for over 20 months.

(As an result of the recession's severity, several money-center banks, such as Citigroup(C Quote) and Bank of Boston, were almost insolvent and had to be saved by the Tisch family.)

Fast-forward to the present.

In 2007, the economy is nearly two-thirds larger than it was 16 years ago, a period in which the downturn in real estate produced nearly $300 billion in losses. But not only is the residential mortgage market much larger now, so are subprime delinquencies and the ultimate losses they will deliver.

Moreover, home mortgage borrowing, home ownership (69% of families vs. only 64% in 1991) and the impact of housing on aggregate economic activity have never been higher. Equally important, household debt as a percentage of GDP is dramatically higher, and home equity as a percentage of home market values has never been lower.