Investment-grade commercial real estate prices gained 4.4% in the third quarter of this year. But, it's hard to tell if -- like brief blips of hope we've seen in consumer spending, unemployment and even luxury meals in London -- this is a change in the market or just a tease.

This increase in the MIT Center for Real Estate's transaction-based index (TBI) is the first up-tick in more than a year and the biggest gain since the middle of 2007. One quarter doesn't make a trend, cautions David Geltner, director of research at the MIT Center for Real Estate, but he says, "this is the strongest sign of a bottom that we've had in two years." The TBI reached 36.5% below its 2007 peak last quarter, up from 39% from the high-water mark in mid-2007.

If you've become comfortable with the current state of the housing market ... don't. Economists at Goldman Sachs (NYSE: GS) and Bank of America's Merrill Lynch (NYSE: BAC) say there's still plenty of risk in the housing market.

Alec Phillips, the head of Goldman's Washington office, said, "The risk of renewed home price declines remains significant." His "working assumption" is a drop of between 5% and 10% by the middle of next year.

In the film version of Tennessee Williams' 'Cat On A Hot Tin Roof' (1958), Maggie 'The Cat' (Elizabeth Taylor), knows her husband Brick (Paul Newman) is hiding something, but she can't figure out what it is.

Later, we learn that Brick is hiding the truth about his father, millionaire Big Daddy (Burl Ives), and he slowly gathers the courage to end the mendacity that has permeated their lives.

At some point the nation will, likewise, end the mendacity about American International Group (NYSE: AIG) and announce the full, probable cost of the orderly stabilization of AIG. For economic conservatives, market absolutists, most Republicans, and others who oppose government intervention, the above would be bad news, but at this juncture, it appears to be unavoidable.

Investors should not read too much into the Dow's nearly 400-point drop Tuesday. What they should concentrate on, in the view of a pair of economists, is the mechanism the U.S. Treasury uses to price toxic assets.

The above is the most important 'unknown' in the U.S. Treasury's financial stability plan, so says economist David H. Wang -- how toxic assets that are clogging banks' balancing sheets and restricting credit -- will be priced.

"Will the United States government set-up a clearinghouse? Or will they design some type of open outcry, or managed open outcry? These are the key unknowns," Wang said. "Treasury Secretary Geithner and his staff cannot rush this decision, but on the other hand they cannot take two quarters to developed it. They have to announce the structure of the pricing program within a couple of weeks. I cannot underscore enough the importance of this pricing methodology. It will be the biggest factor in whether the credit system recovers, or something much worse occurs."

While Washington wrangles over $820 billion to stimulate the economy, the Fed and the Treasury have already invested or guaranteed $9 trillion to keep the financial system from imploding. For some strange reason, this much bigger figure seems to fly out the door with no public debate; little clear idea of how it's being spent; or what benefit it's creating. Now the Treasury is poised to announce its own plan to rescue the financial system. I think that plan needs work.

However, the Treasury plan will not be announced as originally scheduled on Monday because there seems to be a concern that it would complicate the passage of the stimulus plan. Meanwhile, Goldman Sachs Group (NYSE: GS) has estimated that it would cost $4 trillion to absorb all the banks' troubled mortgage and consumer debt.

Will Treasury propose a plan to use government funds to do this absorbing? If so, it would mark the biggest example in American history of letting private interests reap profits from their bad decisions -- in the form of keeping their bonuses which total about $100 billion over the last several years -- while sticking the public with the resulting losses which so far exceed $1 trillion.

Washington Post business columnist and Pulitzer Prize-winner Steven Pearlstein reminds investors that a complex financial crisis will not be solved by a simple solution.

Hence, Pearlstein's offered a four-part solution that he believes will get the United States back on the road to financial health.

The first involves a limited guarantee against default by the federal government for packaged loans that circulate in the "shadow" banking system, such as the way Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) do with conventional mortgage-backed securities. The FDIC is working on plan to do the above, he said, funded by either bank fees or via a modest contribution from the $700 billion TARP.

Second, the FDIC, via a new program that covers $1,000 in refinance closing costs, should be able to encourage more banks to renegotiate at-risk mortgages, greatly reducing the number of home foreclosures that are at the root of the bad bond/toxic asset pipeline.

Comment: The view from here argues that had the FDIC under chairwoman Sheila Bair been allowed to implement a version of the above program a year ago, the U.S. would have been that much closer to reducing foreclosure rates. The previous presidential administration did not act swiftly on Bair's proposal -- an unmitigated policy error that the current administration inherited. Hopefully, the Obama administration will correct it.

U.S. policy makers are putting all hands on deck. All engines are being used to pull this train out of the station. In this case, nearly every cliché applies.

The Federal Reserve Bank of New York announced Monday it has started buying mortgage backed securities (MBS), as part of its $500 billion program to improve credit market liquidity and jump-start the housing market.

The Fed said it began buying MBS guaranteed by Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), and Ginnie Mae. Purchase amounts will be published on the Fed's web site beginning January 8 and will be updated each Thursday.

Goldman Sachs Asset Management (NYSE: GS), Pacific Investment Management Co., and Wellington Management Co. will manage the $500 billion in MBS the Fed expects to purchase by June.

It looks like America has shut down until 2009. And that's probably a good idea because there were so many bad ones in 2008. Bad ideas are like vampires. They charm their way into the good graces of a host society and then they suck the blood right out of them.

Although they all didn't just pop into our lives in 2008, these eight ideas reached a peak of awfulness in 2008:

• Deregulation is good. The wave of deregulation that started in the early 1980s has created enormous problems for society. Sure there were some bad regulations on the books, but just one deregulated industry -- the $62 trillion credit default swaps (CDS) market -- has cost taxpayers hundreds of billions of dollars in the bailout of American International Group (NYSE: AIG).
• If you can lend against it, securitize it. Securitization -- the practice of buying, credit-rating, and bundling loans backed by assets like mortgages, credit card receivables, and leveraged buyout loans -- created the illusion that you could mix risky loans in with safer ones and you could earn above-average returns with no risk. Bad call -- securitization has spread toxic waste around the world from Iceland to Whitefish Bay, Wis.
• Home-ownership is good for everyone. The hungry maw of securitization created enormous demand for new mortgages. And that led mortgage originators to lend to people who couldn't afford to pay back the loans. The $1.3 trillion subprime mortgage market was born and it grew so big that its collapse refused to remain contained. In 2004 Bush bragged about home ownership reaching 69.2% -- three million foreclosures later it seems we should be careful what we wish for.
• Leverage up your balance sheet 30:1 or more. In 2004, the SEC gave financial institutions (FIs) discretion to borrow more money than they had ever borrowed before. Most banks and hedge funds borrowed as much as $35 for every $1 of equity. If they had used their $340 billion in equity to buy the $13 trillion worth of mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs), a 3% decline in the MBSs and CDOs value would have wiped out the FI's capital.

What does the future look like for quasi-public mortgage service giants Fannie Mae and Freddie Mac?

More than likely, it's the conversion of each to an overt, government-based organization, so says economist Peter Dawson. Earlier this year, the U.S. Treasury purchased Fannie and Freddie for $1 billion in senior preferred stock in each company and warrants representing ownership stakes of 79.9%.

Will FNM, FRE become government agencies?

But don't run to sell or buy Fannie's (NYSE: FNM) or Freddie's (NYSE: FRE) stock just yet, Dawson carefully added. There are too many variables and unknowns regarding the health of the U.S. economy to say with a 95% confidence interval what form Fannie and Freddie will take in the Obama Administration, Dawson said.

The biggest factor in Dawson's projection that Fannie and Freddie will have to be formally aligned with federal government operations? The $5.3 trillion in mortgages that the two government service enterprises own or guarantee - - or roughly 44% of the U.S. mortgage market.

"The immediate focus of Congress is the fiscal stimulus package, and that's warranted, given the recession and the large stimulus that will be needed to get GDP headed in the correct direction again," Dawson said. "But one, major, longer-term focus has to be Fannie and Freddie. They are likely to require federal cash infusions, via buying their mortgage-backed securities, or other investments, for at least a decade, probably longer."

Banking analyst Meredith Whitney is credited with questioning assets on bank balance sheets given the collapse in the real estate market.

Taking advantage of a complete lack of information, Ms. Whitney triggered a massive collapse of trust in an industry by claiming that mortgage-backed securities were worth far less than what the market had perceived.

While she may have had a basis for her claims, her assessment was more sensational than factual. Mortgage-backed securities are quite complex instruments whereby loans are sliced, diced and packaged for sale to a global market.

With maturities extending 30 years into the future, it is unreasonable and unfair to assume that paybacks, even with high default rates will amount to what is currently priced into the market.

The lack of understanding of the underlying security or loans at the individual level has created uncertainty that has yet to be resolved.

For fans of the original "Star Wars" movie, think of the weakness in terms of attacking the Death Star. That one hole was exploited (we can debate the merits of doing so later) by Ms. Whitney and those like her.

No mainstream economist or analysts thought the United States financial system and economy would ever face circumstances like these, but fundamentals and a negative spiral have worsened to such a degree that the nation may have to implement a temporary, home mortgage foreclosure for all mortgages, according to an economist.

Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) have already announced a six-week halt to foreclosures and evictions through the holidays, lasting until January 9, to give the servicers time to implement their own program for at-risk mortgages, Bloomberg News reported. The government-sponsored enterprises own or guarantee $5.2 trillion of the $12 trillion U.S. home mortgage market.

National moratorium needed?

Economist Richard Felson told BloggingStocks a national moratorium on the remaining roughly $7 trillion in mortgages would give the incoming Obama Administration time to play-catch up, after the Bush Administration's underperformance on a universal, streamlined mortgage refinancing program. If implemented, the plan would end the rise in home foreclosures that's causing the securities defaults that are elongating the financial crisis.

With apologies to actor William Shatner, How big could the bailout of AIG get? Really big.

The U.S. government -- which is all of us, citizens and taxpayers -- may have to increase its investment in American International Group (NYSE: AIG) by still another $70-80 billion to keep the insurer solvent through the end of 2009.

Just call it USG-AIG

AIG, which reported $43 billion in losses tied to home mortgages in the past quarter, "will probably not function properly if it doesn't receive another cash infusion by September 2009," economist David H. Wang told BloggingStocks Tuesday. Wang based his forecast on his projection for cashed-in credit default swaps stemming from home mortgage defaults.

AIG is a major issuer of credit default swaps, actually a type of credit default insurance, which many holders of mortgage backed securities and bonds purchased to hedge against bond issuer defaults.

"If we project a rise in home mortgage defaults through Q2 2009, that will likely take credit default claims to levels that will require more money for AIG in late 2009," Wang said, although he qualified his projection by stating that it is contingent on negative U.S. GDP for Q1/Q2 2009. A U.S. economic recovery in Q2 2009 is possible, but not likely, Wang said.

AIG's shares fell 15 cents to $2.14 on Tuesday at mid-day, amid a broader market sell-off.

Bonuses for a U.S. Government-rescued Wall Street should take on a 'slightly' leaner tone, according to a sampling of U.S. taxpayers by Bloomberg News. The taxpayers' judgment regarding how large the bonuses should be? Zip. Nothing. Nada. Niet.

Wall Street, which created many of the Frankenstein-like financial instruments that either distorted and/or hid loan risk, and also in some cases encouraged the issuing of problematic mortgage forms, is not justified in paying bonuses, and certainly should not award them following the government's massive $700 billion bail-out of the industry, a sampling of U.S. taxpayers indicated.

One U.S. resident, Ken Karlson, a 61-year-old Vietnam War veteran who lives in Illinois told Bloomberg News, "I may not understand everything, but I do understand common sense." He added, "the bailout money should not have been given to them in the first place."

Economist Richard Felson told BloggingStocks Tuesday acrimony from U.S. citizens is not outlandish or unreasonable given the facts to-date of the current financial crisis.

New York Times (NYSE: NYT) Columnist David Brooks draws attention to a U.S. economic discussion and reality that's been all-but-sidelined in the past three decades, particularly among younger investors and others who believe that history began in 1981. Namely, that there's been a distinct cyclicality to the nation's economic / public policy history.

Is a new progressive era ahead?

That may come as a surprise to market absolutists and others who see economic history and their view of economic progress as a straight line towards privatization. In fact, periods of economic conservatism and liberalism -- the latter also known as progressive reform -- have cycled for much of the nation's history.

For Brooks, those economic blinders help explain both the market absolutists' befuddlement at the financial crisis around them and their inability to adapt to the electoral demands brought on by the crisis. Market absolutists are in a straightjacket of a party that is ailing and part of a conservatism that is behind the times, he says.

On the cycle's timing, economist David H. Wang argues that the old era ends and the new era begins not when social pressures build from the bottom-up, but when institutions -- like investment banks, mortgage lenders and credit default swap issuers -- fail from the top-down.

In the accounting business, helping clients improve earnings is not that hard, if you can change the rules. Banks would like the boring green eye-shades to alter how they value assets on bank balance sheets, a pretty nifty way to cut losses without doing anything meaningful to balance sheets.

According to Reuters, "Fair value accounting, which requires assets to be valued at market prices, has been blamed for billions of dollars in write-downs by some U.S. banks and policymakers."

Yes, but wouldn't all their investors like to see how badly banks were managed? How big the gambles were on toilet paper assets like mortgage-backed securities?

While it is fine to sweep the dirt under the rug, the rules are the rules and have been the rules for some time. Changing them now would cause a dislocation in reporting, For 2008, losses may be accounted for under one set of criteria. Next year, that may change. How do shareholders see the actual difference in earnings from one year to the next if the way that assets are valued is changed?

It is always nice to re-write the rule book. Why shouldn't a basketball player who is active now be able to score 100,000 points because he gets credit for a point every time he blows his nose? Just a year or so ago, he actually had to put the ball into the hoop.

Douglas A. McIntyre is an editor at 247wallst.com.