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With all the negative news that we have seen lately, it's nice to hear one piece of positive news regarding the housing market. We got that today on news that pending home sales rose unexpectedly in August.

The National Association of Realtors tracks home sales in its index, and reported today that its pending home sales index rose from 87 in July up to 93.7 in August. Going into today's report, analysts had been expecting to see the index actual fall, and were thinking that we would see the number drop down to 86 in the month, so the increase was definitely a bit of good news in an otherwise rocky market.

The areas of the country that saw the best jump in July were the same ones that have been beaten up the most over the past year, including California, Nevada, Florida, and Arizona.

One of the few things that Barack Obama and John McCain agreed on during last night's televised debate was that billionaire Warren Buffett would make a good Secretary of the Treasury.

Odds are that the universally respected Buffett won't take the job. Why does he need the headache at this point in his life? Besides, he may not be the type of government official investors would like. Much to the horror of political conservatives, the Oracle of Omaha is backing Obama. He has come out against such bedrock Republican principles as abolishing the so-called death tax on inherited wealth. The financial disclosure requirements alone probably are enough to scare Buffett away from government service.

To counter Obama's Buffett card, McCain said that former eBay Inc. (NASDAQ: EBAY) CEO Meg Whitman might be the right person for the job. I guess no one mentioned to the Arizona senator the massive layoffs planned by the online auctioneer. Interesting how another McCain supporter, ex-Hewlett Packard Co. (NASDAQ: HPQ) Chief Executive Carly Fiorina, did not merit consideration. Given her disastrous tenure, it's no wonder.

Another good potential Treasury Secretary neither brought up is Michael Bloomberg. The founder of Bloomberg LP (where I worked for seven years) clearly knows the markets. He's rich and has shown savvy in navigating New York City's political landmines that Washington should be a walk in the park. Too bad he's got his heart set on a third time as mayor.

The federal government has done virtually everything it can to solve the current credit and liquidity crisis. But even today's decision by the Federal Reserve to buy commercial paper did not get much reaction.

Going through the list, the Treasury is providing the FDIC capital for covering deposits in failing banks. It has set up its $700 billion "Paulson" fund. Bernanke has opened the emergency loan systems for banks and brokerage to the extent of making as much as $900 billion available. It may also cut rates.

Since the Dow is off 1,500 points in a month, it is safe to say that nothing done so far is cause for celebration.

What has been neglected over the last several months is the simple fact that Americans can still work. Burdened with debt, unable to make car payments and buy gas, and facing mortgages, they can still work. But if the economy snuffs out jobs in record numbers, the last wall defending the economy will have broken.

One of the most basic precepts of the U.S. economy is that Gross Domestic Product (GDP) growth depends on the consumer -- some 70% of GDP growth, in particular. The U.S. has created two inter-related industry clusters to assure that consumer spending keeps growing. While one continues in full force, the other is failing fast. This is causing consumers to put their spending into reverse, creating an economy-wide recession diet on steroids.

What are these two inter-related industry clusters? The Celebrity Industrial Complex (CIC) assures that we see images of the wealthiest and most celebrated sliver of society -- creating a desire to close the gap between us and them. And the Borrowing Industrial Complex (BIC) provides the cash we otherwise could not afford to pay for the goods and services that never quite close that gap. The CIC is still going strong, but with incomes down since 2000, household wealth slashed by $6 trillion, and banks scrambling for capital, the BIC is in cardiac arrest.

Consumers have decided to ignore the psychological pull of the CIC and use whatever money they still have to keep their families alive. While official government statistics don't show this -- perhaps they will when it releases third quarter reports -- consumers are cutting back. Gil Colon, sales manager at Villa Reale, a Las Vegas art and furniture store puts it well: "People have lost their confidence. They have no buying power. They are losing their retirements, their vacation funds, and they are scared to commit to buying anything," according to The New York Times.

Ever since this mortgage mess started I've been wondering what lit this catastrophic fire that has already destroyed so many major financial institutions, as well as the lives of millions of Americans who have lost their homes to foreclosures. While we've talked about the abuses of the mortgage mess, the true culprit is the easy money that was made available.

An asset bubble needs easy money in order to inflate the bubble and today's New York Times makes a good case that a 2004 rule change by the SEC gave the green light to major U.S. investment companies. This rule change lit the match that fueled this entire mess. So let's take a look at what the change is and how failures to use the tools available to the SEC led to our current disaster. And, by the way, our current Treasury secretary, Henry M. Paulson, Jr., headed Goldman Sachs (NYSE: GS) at the time of this disastrous rule change. Goldman was one of the five investment banks that pushed for this change.

In 2004, investment bankers wanted an exemption from an old tried-and-true regulation that limited the amount of debt they could take on. They thought they were grown ups who should be trusted to know how much risk they could take on and how they would control this risk to preserve their companies. Five commissioners of the SEC decided to believe them and quietly changed capital rules freeing up the companies to make their own debt level decisions. To make matters worse, they established a program that let these banks police themselves.

The Oracle of Omaha, Warren Buffett, of Berkshire Hathaway (NYSE: BRK.A) spent a few moments on CNN answering some key questions about the economy at a Fortune Magazine Forum. He was asked where he would place the blame for the current financial crises being played out on the world stage, and he said he is not one to point fingers. There is plenty of blame to go around.

Initially Buffett quipped that "every saint has a past, and every sinner has a future." He went on to say that the everyone participated in the creation of the housing bubble with the unrealistic expectation that prices would continue to rise.

He summarized that home ownership is worshiped in the United States, and once cheap funding became available and prices started to rise there became the feeling that if you did not buy a home now you would be facing higher prices next year and perhaps less favorable interest rates as well.

Oh how the mighty have fallen.

With Lehman Bros. in the midst of winding up what's left of its operations following its bankruptcy filing, chairman and CEO Richard Fuld has been kicked out of the corner office at Lehman's Manhattan headquarters -- and sent packing to to a 41st floor office at 1271 6th Avenue.

Lehman's building at 745 7th Avenue is now the headquarters for Barclays' investment banking operations. It has no use for Mr. Fuld. With a flair for drama, The Wall Street Journal sums it up (subscription required) this way: "Napoleon cooled his heels on Elba. The Dalai Lama lives in Dharamsala, India. And Lehman Brothers Holdings Chairman and CEO Richard Fuld Jr. will be banished to 1271 Sixth Ave."

Meanwhile former CFO Erin Callan -- who was pushed out as a sacrificial lamb back in July -- gave her first post-Lehman interview to Fortune, telling the reporter that Mr. Fuld had been brought to tears by the difficulties the company was facing.

If you're in the market for $15 million worth of Fuld's modern art collection, Christie's has got you covered.

What if the economic bailout package is not enough to free the locked-up credit markets? Big banks may sell bad assets to The Treasury Department, but will they loan that money to the man in the street or small businesses?

If the Paulson plan is not effective, the number of arrows in the federal government's quiver drops substantially.

The Fed has tried to save the economy with a number of rate cuts. Many analysts have thought the agency would not cut again before the election, but those many analysts could be wrong.

According to The Wall Street Journal, "Federal Reserve officials are weighing further interest-rate cuts, even if Congress passes a $700 billion rescue plan, in the face of a deteriorating economic outlook and severely strained financial conditions."

The Fed had better hurry along. On Wednesday, reported car sales figures were down over 30% for September for many auto companies. The major excuse for the problem was not gas prices, it was the inability of people to get car loans. There is absolutely no evidence that the housing or mortgage markets are getting better. Default rates on credit cards are rising. Retail sales this holiday season are likely to be pathetic.

The economy is at the stage when it is time to pull out all the stops. The window to save the consumer may close in the next week or so. That may mix metaphors a bit, but that makes it no less true.

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

With the U.S. Senate expected to debate and vote on a revised bailout/rescue bill in the next day or so (famous last words), two revisions the world's greatest deliberative body should incorporate are bank recapitalization options and funding to refinance mortgages, economists say.

BloggingStocks' Peter Cohan has written extensively on the need to recapitalize banks, and economist Richard Felson concurs. However, Felson argued that the revised rescue bill should give banks and other institutions the option of either offering their distressed/bad debts to the U.S. Treasury in its reverse auction or accepting a mutually agreeable investment by the U.S. Treasury into the institution.

Creating options for stressed banks

"This will give banks more options, and in my view more incentives to participate in the rescue plan. If the plan just contains asset purchase provisions some banks may balk at the prospect of selling some assets at a fire-sale price of 10 cents or 15 cents on the dollar, and that may prevent some distressed assets from being removed from the system, delaying the financial system's recovery," Felson said. "Offering to buy a stake in the bank offers another recapitalization option."

Everywhere I go in the suburban wonderland where I live there seems to be a new housing development. When I visited my brother- and sister-in-law in a neighboring town, I must have passed seven of them. Apparently, word of the housing slowdown has not reached Burlington County, New Jersey.

This seems like madness. After all, the housing market is in the tank. Applications for mortgages fell 23% on a seasonally adjusted basis for the week ended September 26, according to data from the Mortgage Bankers Association cited by Reuters. U.S. single-family home prices fell a record 16.3 percent in July from a year earlier, according to the Standard & Poor's/Case-Shiller Home Price Indexes.

Consumer confidence is shaky -- heck, I am not feeling so confident even though I bought a car. Foreclosures are at record levels -- still. Banks are tightening their credit standards, making it difficult for borrowers without sterling credit to get loans or refinance their existing ones. That's what makes the rise in the home builder stocks even more baffling.

Shares of Hovnanian Enterprises Inc. (NYSE: HOV), Toll Brothers Inc. (NYSE: TOL) and Lennar Corp. (NYSE:LEN) all gained double-digit percentages in the third quarter. The reason? Investors are chomping at the bit to call a bottom in the housing market. But I sat that's premature. S&P points out that many metropolitan areas are showing double-digit declines in home values. "There are signs of a slowdown in the rate of decline across the metro areas but no evidence of a bottom," David Blitzer, chairman of S&P's index committee, said in a statement.

Newt Gingrich has gone on the record with a solution to the crisis that is the best I have seen so far. Rather than pass a $700 billion bailout, suspend the accounting rules that are causing the liquidity crisis to begin with.

In the past few years, accounting rules changed and these changes are in part causing the current crisis. Specifically, the problem is mark-to-market accounting where all assets are required to be valued at current market prices. If the market is temporarily depressed, it can cause an artificial crisis.

Let me give a silly but simple illustration. If you have 20 one dollar bills in your wallet, we would all agree you have a net worth of $20. Thirsty Bob also has one dollar bill in his wallet and walks into the break room and wants to buy a Coke. Soda in the machine costs 50 cents, but it only takes quarters. Thirsty Bob asks if anyone has change and they all say no. Sam says he has only two quarters and will trade Thirsty Bob -- who is really thirsty -- two quarters for a dollar. Thirsty Bob quickly agrees to take Sam up one his offer in order to get the Coke now. Bob knows that two quarters for a dollar is a bad deal, but he is takes the deal anyway.

The housing market is not done "adjusting." The Case-Shiller index of house prices fell at a record rate in July 2008. Its 20-city index fell 16.3% from the previous year, while the 10-city index declined an even greater 17.5% -- more than it ever has in its 21-year history. Las Vegas had the worst decline at 30%.

The big picture is that the ratio of the median house price to median income has risen from 2.8 to 4 in the last several years. That's because the mortgage-backed security (MBS) industrial complex needed more raw material for its factory. So it lent money to people who could not pay it back -- this is the $1.3 trillion subprime market. Now that it's becoming clear that more and more people will not be paying back those mortgages, the credit wind is coming out of the sails of the housing market.

The decline in housing prices could be good news if it leads to a change in American culture. We need to recognize that the celebrity industrial complex has gone hand-in-hand with the consumer lending business to create a need to live beyond our means and then fill that need with reckless borrowing. Would it be so bad for people to actually be able to afford what they own or rent rather than to feel like they are one missed payment away from losing it all?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

Few economists / analysts would deny that the financial crisis is so complex, with numerous casual factors, that there's more than enough blame to go around: no one party can or should be seen as 'the culprit.' Moreover, what's paramount now is to identify what works, i.e. what helps solve the crisis, and implement it.

The U.S. Congress' bailout / rescue bill (pdf) is one tool: it will help. If it goes reasonably according to plan, the U.S. Treasury, and the companion agencies the rescue creates, will slowly remove distressed / bad assets from the financial system and in the process would both stabilize the credit markets, and equally important, restore confidence in the financial system.

Another tool: mortgage help in the form of refinanced mortgages for homeowners having trouble paying their mortgage / nearing default.

Economist David H. Wang said Congressional Democrats were unsuccessful in their effort to get U.S. bankruptcy laws amended so that judges could adjust the terms of mortgages -- Congressional Republicans were adamantly opposed to it -- but the bailout / rescue package does authorize the U.S. Government to further assist homeowners who face mortgage defaults.

A close look at the bailout legislation which will put as much as $700 billion into the US financial system has language to help homeowners with their mortgages. It is so complex and ill-defined that it is probably close to meaningless.

According to The Wall Street Journal, "There are more questions than answers about how effective the government's program will be. If the government buys entire loans, it will have more control of terms for homeowners than if it buys pieces of mortgage-backed securities."

In how many cases will the Treasury buy assets which include a lot of individual mortgages? Probably not many. The entire theory behind mortgage-backed securities is that they broke mortgages pools into pieces and combined them with other pools of home loans to mitigate risk. The system obviously did not work. Unwinding it down to the individual mortgage level is unlikely to work either.

Banks that get bailout money may be no more likely to grant or refinance mortgages than they were before. When these banks could borrow tens of billion of dollars from the Fed, they put the capital toward reserves. They did not want the risk of putting more capital into the housing market.

The truth is that the bailout does almost nothing for the person struggling with mortgage payments. The systems does not want to give him money because the value of his home may drop another 10%, or maybe more.

What the Treasury and Congress are saying by putting vague language on individual mortgages into the bill is that they do not want to be bound by details of bailing out the little guy. There is too much risk in that.

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

Let me get this straight: the Democrats are backing George Bush's $700 billion rescue plan that Republicans oppose. These are strange times.

House Republicans have many gripes with the plan. They are pushing to fund the recovery of financial services companies with private capital. Others are raising worries about the cost and the timing of the rescue. These are all valid questions.

Then there's the presidential campaign to consider. John McCain is threatening to skip tomorrow's presidential debates unless a deal on the bailout is reached. Maybe Republicans are throwing up roadblocks so McCain can swoop in and solve the impasse, looking presidential in the process. Barack Obama is also using this bailout for his political gain.

Meanwhile, Democrats are pushing for relief for cash-strapped homeowners. So far, they are not getting much sympathy from the Bush administration.

Treasury Secretary Henry Paulson recently said "the vast majority of foreclosures in this country ... are coming from people who either don't want to stay in their home, took out loans they couldn't afford as the result of irresponsible lending practices."

That's bologna, according to the Center for Responsible Lending, which says that the vast majority of people want to stay in their homes and could afford to if the courts were allowed to modify mortgages. Consumer advocates back the idea as do most Democrats. Bankruptcy judges think it's a good idea as well. The mortgage industry and some fiscal conservatives oppose this provision, arguing that it rewards people for making bad investment decisions.