If a vote were held Thursday or Friday, the U.S. Treasury's $700 billion bailout bill would probably pass both chambers of the U.S. Congress, but by narrow margins and with a) an equity stake for U.S. taxpayers for every company that receives assistance, b) a cap on executive compensation, and c) oversight provisions.

Once the bailout work is done, should the U.S. Congress also pass a homeowners assistance bill to help more homeowners with at-risk / burdensome mortgages refinance to secure a lower interest rate?

As BloggingStocks' Jon Berr pointed out Monday, while lawmakers (and no doubt taxpayers) do not want to reward housing speculators, there's a large pool of borrowers who will be able to pay their mortgages if they can get out of high interest rate notes, and other burdensome adjustable rate mortgages, and refinance at a low, 30-year fixed rate.

While it's true the U.S. Government and taxpayers would end up subsidizing refinanced mortgages if the government receives interest that's less than it could by investing the money elsewhere, the costs of foreclosure - leading to bond defaults - leading to banking institution stress / systemic stress will undoubtedly be far greater, so says economist David H. Wang.

If you think that the 'too big to fail' / 'too interconnected to fail' doctrine probably protects the Bank of America and JP Morgan Chase, you think right. But don't expect either stock to race-up like Microsoft (NASDAQ: MSFT) did in the 'Wonderful 1990s' -- not just yet.

The U.S. Government's estimated $700 billion plan to stabilize credit markets will likely safeguard both BAC and JPM due to the large impact a failure of each would have on the financial system, Luigi Zingales, professor of finance at the University of Chicago, told Bloomberg News Monday, adding that it "will definitely make their bonds safer."

BAC, JPM: Operational challenges ahead

However, economist Richard Felson told BloggingStocks Monday investors should not rush out and buy either stock just yet. Felson added that he does not have a rating on nor own shares in either company. The Bank of America (NYSE: BAC), which closed Friday at $37.48, has a p/e of 21; JP Morgan Chase (NYSE: JPM), at $47.05, a p/e of 15.5.

"Each has a series of operational issues to address in the financial services space," Felson said. "The Bank of America has a major merger and culture integration process ahead following the purchase of Merrill Lynch. Major employee, client retention and investment decisions are ahead, and this will weigh on shares."

Many economists, analysts, traders and others agree it's way too soon to assess the impact of this latest, mortgage-related jolt on the stock and bond markets, and on the U.S. and global economies.

There are too many moving parts, and too many unknowns to form meaningful, enduring conclusions. The reason? The financial world order we see today may not, in fact, be the financial world order we see tomorrow. The Dow was down about 256 points to 11,165 early Monday afternoon.

But there is one conclusion U.S. investors / citizens can form regarding the U.S. economy, so says an economist: expanding credit and rising home prices, in and of themselves, are not engines of economic growth.

Now, everyone's recognizing 'the obvious'

"We have now entered the age of recognizing the obvious," economist Richard Felson said. "Almost everyone knew that the booming housing market would slow down as soon as all potential buyers had been tapped and as the American economy slowed. But few foresaw the impact the slowdown would have on mortgage bonds, their owners, and the financial system. We now have to rebuild the American credit market, and global credit market, as well, to a degree. It will be a major task."

The primary source of all the above, in Felson's interpretation? Structural problems in the U.S. economy, primarily a lack of jobs, or low job growth, he said.

"For the better part of four years, America went blithely along, confident that the fundamentals of the [U.S.] economy were sound. Yet all the while, job growth and its companion, rising median wages, were inadequate. But they were ignored because corporate earnings were up and home values were rising. But it was a building constructed on quicksand," Felson said. "The boom was not sustainable. The [U.S.] economy did not have growth engines in place for sustainable growth. "

The real estate research firm Zillow.com released a sobering statistic, and it took some by surprise: more than one-third of homeowners who bought in the past five years have negative equity in their homes.

Negative equity is owing more on your mortgage than the market value of your home. On the heels of the United States' greatest residential real estate boom in the modern era, how did the above occur?

Two factors, so says economist Peter Dawson.

First, many regions of the U.S., particularly the west, experienced abnormal gains during the 2003-2007 real estate boom. "Total appreciation rates over 300% were not unusual during the period. It was an amazing run, fueled by adequate national GDP growth, and low mortgage rates," Dawson said. "But as we've seen, ultimately the appreciation rates proved to be unsustainable, everywhere they occurred."

Dawson says a 7-9% annual increase in the U.S. median home price is normal, and his models label a 10% annual increase or higher as "outsized" -- a deviation from the mean that calls for a correction at some point in time. "But during the boom, it was not uncommon to see 30%, 40%, 50% annual increases over multiple years," Dawson said. "Clearly unsustainable. Downright frothy. But these conclusions were largely ignored during the boom, on the fallacy of 'what has occurred will continue.' "

Second, a financial habit shifted, Dawson said. Way, way back in the twentieth century, Dawson recalled, the biggest stigma when he grew up in a typical neighborhood in White Plains, N.Y., a suburb about an hour north of New York City, was... Not gaining acceptance at a good college? No. Not getting the hottest date for the high school senior prom? No. "We learned that the Smith's [not their real name] down the street had to take out...a second mortgage," Dawson said.

The protracted housing slump that has devastated U.S. home prices now appears to have fully-enveloped the United Kingdom. Home prices in the United Kingdom in August fell at their fastest pace in two decades (pdf), U.K.-based mortgage lender Nationwide Building Society announced Thursday.

On a year-over-year basis, the average price of a U.K. home plummeted 10.5% to $301,500 or 164,654 British pounds in August, NBS said. Further, it was the first year-over-year double-digit decline in the U.K. since 1990.

London-based economist Mark Chandler told BloggingStocks Thursday the August U.K. housing data, "is just dreadful."

"Housing in the U.K. is becoming a bit of a 'magical mystery tour,' to borrow a phrase from The Beatles. For a month or so, we thought the declines in home prices had moderated. Apparently not," Chandler said. "Tighter lending requirements and real concern about the economy have sapped sales and it's really showing up in the price data."

With the world's top central bankers gathering in Jackson Hole, Wyoming for their annual retreat, amid the global economy's worst credit crunch in a generation and slowing GDP growth in every region, BloggingStocks asked a few economists what, in their opinion, should be on the central bankers' minds.

Economist David H. Wang – "I bet they sneak away for a few minutes to watch the United States versus Argentina [2008 Olympics] semi-final basketball game today. I would. Seriously, on the one hand central bankers face the prospect of another round of housing-related write-offs and the need to intervene to keep markets liquid. On the other hand, we still have oil-fed inflation in the system, so my sense is they will issue a statement indicating that the major central banks 'stand at the ready to provide additional liquidity and take other measures' to keep markets functioning."

Economist Peter Dawson – "I would really like to see some European Central Bank comments from [President Jean-Claude] Trichet that he's ready to cut rates and that the greater risk in Europe, like the U.S., is toward recession. Demand in Europe is slowing, and if E.U.-U.S. trade flows continue to decline, that will prolong the recession. Hence, ECB monetary policy is intrinsic to the recovery story."

Economist Glen Langan – "Probably the most important item on their agenda, after maintaining liquid, functioning markets, concerns long-term interest rates. They haven't fallen, due to banks' reluctance to lend, in order to repair their balance sheets. Housing faces a 2-3 year recovery period but we'll need long-term mortgage rates for 30-year fixed loans to drift back toward 6.00% or 5.75% to speed housing's transition back to health. If monetary officials don't find a way to get long-term rates to trend lower, that delays the recovery."

Want a classic example of how the real estate slump is affecting not only the construction industry and home owners, but also states and municipalities, as well?

Consider the plight of the nation's largest city, the City of New York.

Wall Street's mortgage losses have ballooned to such a degree that some firms may pay small or no taxes for years, Bloomberg News reported. That's right: no taxes for years.

Rising tax revenues, no more

For much of the current decade, indeed for much of the 1990s as well, the city could count on rising tax revenue from Wall Street firms -- based on increased securities industry business -- as a starting point for the city's budget. Not now: the city, which derives about 20% of its revenue from Wall Street businesses, is projecting a decline in revenue from Wall Street firms -- a contraction that is expected to widen the this year's $1.5 budget deficit in fiscal 2009 to $2.3 billion next year, fiscal 2010, and then to $5.96 billion in fiscal 2011 budget deficit, Bloomberg News reported. The city's budget for fiscal 2009 is $59.1 billion.

The Wall Street recession has put the social service goals of Mayor Michael R. Bloomberg on hold, for the most part. Bloomberg has already asked city department and agency heads to implement a 6.4% spending cut; he will likely ask department heads to identify other cost savings of up to 3%, should revenues continue to come in below projections.

Want more proof of the awfulness of the housing market? According to Zillow, one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth.

Among the findings:

• Second quarter home prices fell 9.9% from a year earlier resulting in 29% of homeowners getting negative equity;
• Forty-five percent of homeowners who bought at the peak of the market in 2006 are underwater;
• Overall, U.S. home values in the second quarter posted the largest year-over-year decline in the past 12 years;
• The median U.S. home value has not been this low since the fourth quarter of 2004;
• Nationwide, nearly one in four (23.7%) homes sold during the past year sold for a loss while nearly 15% of sales were foreclosures.

These figures are unbelievable. They underscore that the housing market is nowhere near a bottom. The effects of the downturn will be felt for years to come since the biggest asset of many Americans is their home. You have to pity people who are trying to move closer to their jobs because of high gas prices. They are screwed no matter what they do.

"For homeowners who need to sell, this is a gravely serious situation," Zillow's Stan Humphries said in an interview with Bloomberg. "It can also be harmful to communities where the number of unsold homes adds more to inventory and puts downward pressure on prices."

The housing market won't improve until the huge amount of unsold inventory is cleared out, including "spec homes" being put up by builders in the hopes of luring buyers. Things are going to remain ugly for a while.

It looks like the economic slowdown that has chopped (or eliminated) returns in many asset classes is set to hit another sector, and a rarefied one at that: the hedge fund sector.

Hedge funds may post their worst monthly performance result in five years in July, after trade calculations on financial stocks and crude oil backfired, according to data provided by Hedge Fund Research Inc., Bloomberg News reported Monday.

Hedge Fund Research Inc.'s Global Hedge Fund Index was down 3.16% in July as of July 24 -- on pace to record its largest monthly decline since 2003. The index is also down 4.16% for the year.

As Washington legislation goes, the housing bailout bill that the U.S. House and Senate passed last week and that President Bush is expected to sign this week, is omnibus in scope and, ultimately, in budget and economic impact.

Economist Glen Langan told BloggingStocks Monday the bill's two key components are the assistance to Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), and a new Federal Housing Administration program. The former, Langan says, "represents an implied guarantee" of Fannie and Freddie by the U.S. Government, which should restore confidence in each, and in the secondary mortgage market. Banks and other mortgage lenders, he said, "will now be more willing to write conforming loans, knowing that Fannie and Freddie will have the funds available to purchase and back these loans."

The latter, a Federal Housing Administration program that enables banks to sell to the U.S. Government mortgages unlikely to be repaid, "will help stem the tide of foreclosures that's plaguing the housing sector," as well as "relieve banks/lenders of less-than-stellar to non-performing assets," Langan said.

Beginning of the end of the housing slump?

Some House and Senate Republicans, and a few Democrats, among others, have chaffed at the bailout bill's cost and ultimate impact on the U.S. taxpayer. House Republican leader U.S. Rep. John Boehner, R-Ohio, told Bloomberg News the bill did not reform Fannie and Freddie enough, and will leave taxpayers with a bill for "billions and billions of dollars." Langan said Rep. Boehner's concern is legitimate.

The dollar rose to a one-month high Thursday morning, as dollar bulls cheered a report that U.S. Congressional legislation designed to shore-up Fannie Mae and Freddie Mac had passed the House and that the Senate will begin evaluating the measure.

The House voted 272-152 in favor of the measure, and the Senate is expected to pass the bill within days, The Washington Post reported Thursday. President Bush, reversing earlier opposition to a component of the bill that would help communities hit hard by foreclosures, said he will sign the legislation in its current form.

Investors in Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) must be applauding the government bailout. To my knowledge, it is unprecedented for the government to trade this openly in the stock of a private company. It is as if the government has become Goldman Sachs Group Inc. (NYSE: GS) which is not surprising since the Treasury Secretary, Hank Paulson, used to run Goldman.

Based on what has happened it looks to me like the Administration is trying to prove just how incompetent government is so we will agree to cut its budget. There are two possibilities: either the government knew how bad things were and did nothing or it didn't know. If it did know how bad things were, it should have done something to fix the problem, such as requiring Fannie and Freddie to raise more capital a year or two ago.

Perhaps it knew last week how bad things are and did not release data supporting its claim that they were in good shape because such data did not exist. If they were in good shape, the government should have been able to release comforting data and the problem would have gone away. The need to announce the bailout plan as a way to save them suggests an amazing lack of insight into their ability to cover their liabilities years or a realization that they were bankrupt and needed to be bailed out.

U.S. Federal Reserve Chairman Ben Bernanke said Tuesday the world's most powerful central bank may extend securities dealers' access to direct loans from the Fed into 2009 as long as emergency conditions "continue to prevail."

Bernanke, speaking Tuesday in Arlington, Virginia, at the FDIC Forum on Mortgage Lending for Low/Moderate Income Households, said "the Federal Reserve is strongly committed" to financial stability and is "considering several options, including extending the duration of our facilities for primary dealers beyond year-end."

Further, Bernanke also said the Fed would "take a leading role" in any liquidation process for a failing investment bank.

The Fed, and other U.S. Government institutions, as well as other major central banks, are in the midst of dealing with the aftereffects of the end of the housing boom in the U.S., which led to a surge in mortgage foreclosures and related asset-back defaults.

Baby Boomers, in some cases already facing the 'double demands' of caring for kids and aging parents, have another economic concern, at least for the next phase of the housing cycle: substantially lower household net worth, as a result of declining home prices, so says a Washington-based think tank.

The Center for Economic and Policy Research says the median households head by those ages 45-54 in 2009 will have about 25% less wealth than the similar demographic in 2004. In dollars, household wealth will decline to $113,268 from $150,113.

Further, the above assume March 2008's housing prices hold for 2009: if they don't and prices fall another 10%, household net worth declines by about 35%; 20%, by about 45%, the CEPR said.

Economist Peter Dawson, who is not affiliated with the CEPR or the study, told BloggingStocks part of the problem was "unreasonable expectations regarding home appreciation rates, the belief that 10-15% real estate gains would continue for decades. It got too many adults out of the traditional saving and investing mode and into thinking their home would serve as a major return on investment." Most homes do appreciate, and they can help build wealth, Dawson said, but homeowners must think in terms of a 6-9% average, annual appreciation rate, "which is a more-realistic return for residential dwellings."