Cramer: Housing Needs a Tax Credit

Solve housing. Solve collateral. If the Bush administration and the Federal Reserve had found a way to stop house price depreciation, we would never have been in this jam. But they wouldn't, in part because they endlessly fretted about inflation -- which was all driven by China and speculation -- and they didn't see the sheer numbers of foreclosures coming.

Everything comes down to housing. The wealth effect, a function of house values and portfolio values, is being gutted by both. You can't fix stocks -- they are reflective of earnings -- but if you stabilized home values, you could get some confidence, particularly given the collapse in oil. Stabilize housing, and you get a positive trend in consumer spending.

If houses stop depreciating, banks would be anxious to lend because the spread on what they pay and what they can lend at is huge. Bank of America (BAC Quote) will go from being the biggest casualty to a home run, if it can make it through the housing valley. JPMorgan (JPM Quote) and Wells (WFC Quote) would be rewarded for their consolidations, not punished.

But the administration never really addressed this issue. One, the homebuilding lobby was too powerful. We should have demanded, at the bank level, that these companies never be able to joint venture with banks. It killed the banks, but it didn't kill the homebuilders. There are still too many of them. How is Beazer (BZH Quote) still alive? Hovnanian (HOV Quote)? Doesn't anyone ever go out of business or get merged here?

Second, we needed very badly to cut rates. We did it too late. But then we came up with TARP, which would keep people in homes and buy bad whole loans from Bank of America and JP Morgan and Wells Fargo. Then Paulson just betrayed them, one of the most amazing, unopposed turnabouts in history. It really killed the Comericas (CMA Quote) and Keys (KEY Quote) and PNCs (PNC Quote), too. They were going to use this strategy to create good and bad banks. They failed. (Oddly, Citigroup (C Quote) is much less affected, but it doesn't matter because it has so many other issues.)

Now the foreclosures are setting records. Probably more than 50% of the homes bought in the 2005-2007 period are worth less the mortgage. That means 8 million people should walk away from their homes. We simply can't afford it as a nation. We will have a second Great Depression. It could be worse than the first.