I'm not sure whether the statements out of Washington are still operative, but one psuedo-sophisticated justification advanced in various backgrounders to explain the failure of government policy, to date, to turn the clock back, to say, mid-2006, is that we can't fix the banks until we work through the housing crisis.
I'm coming to the conclusion this is wrong on two counts.
First, conceptually, it confuses the triggering event with the underlying causes of the current situation. If the trigger had been subprime mortgages, it was going to be hung bridge loans. If it hadn't been hung bridge loans, it would have been leverage in Hedgistan (remember Hedgistan?).
Second, I'm beginning to think that there is a link, but the policymakers have it backwards. In other words, until the financial sector's crisis is worked through, the downward pressure on housing prices pretty much insures that the housing issues will continue to vex and plague us all. Right now, the lower end of the housing market has repriced, and there is adequate liquidity so that transactional volumes are recovering (at the new, lower price levels). Time will tell whether those prices hold, of if the knife catchers were early. But at least it's a functioning market. However, when you reach the part of the housing market that relies on jumbo financing, it is dead. Yes, there were always a few uber rich cash buyers, but they never made the market. Right now, you can't borrow in the amounts required to finance a house costing more than a million dollars, the owners are generally in a position to 'wait it out' and the prospective buyers are sidelined by a lack of financing (also by a nervous apprehension that the market is liable to crack at those price levels, just like it did at the entry level). The conflux--buyers strike, no financing and obstinate sellers--will likely be resolved just as it was lower down the food chain.
But that resolution will have a await the return of the lenders, and the lenders are not coming back until the mess in the financial services sector is straightened out.