When your biggest local real estate markets, such as Los Angeles Arizona and South Florida suffer declines of 30% in value and every loan made since 2004 is under water, there is no way for the whole system not to take a big bath.
The inverse pyramid of Credit which inflated property prices is held up by a base of Capital of "Credit Institutions". In recent years, through securitisation, credit derivatives, credit insurance and combinations thereof this Capital base has increased massively through being "outsourced" to Investors. The pyramid of Credit increased commensurately as a consequence, and the "Mother of All Bubbles" is the result.
Since the point of "Peak Credit" last year, defaults have been eating away rapidly at this Capital base. New Capital is both sparse and expensive, so that capital outsourcing no longer occurs, the cost of Capital for credit institutions is sharply higher and what they charge for credit is much higher. What all this means in practice is that new credit is not available to support anything more than the level of property prices that maintained at a time when credit institutions made prudent loans (eg low loan to income, and maybe 20% deposit). ie the 1970's or even earlier.
Lower Central Bank rates of interest are almost irrelevant as a "fix", since the problem lies in the borrowers' inability to repay the Loan Principal. Over a period of years, Banks will maintain high rates to customers using the lower Central Bank rates to increase their margins and slooowly rebuild their Capital base.
I would guess that reversion to a 1970's style (or earlier) Capital Base and regime will mean, in the US at least, anything between a 50% to 70% fall in property prices, and more in some places. This fall will occur once jobs really start to disappear, when even current reduced rental values and property prices become "unaffordable", and defaults go through the roof reducing Capital still further.
The cause of the forthcoming recession/depression is that the credit = money necessary for economic activity will not be deployed in productive activity but will be used to replace the money literally destroyed in defaults.
There is no way to put Humpty Dumpty back together again. Our deficit-based economy is finally finished, courtesy of the need for literally trillions of dollars worth of new Capital/ "Equity". We have Greenspan to thank for bringing the inevitable forward by a few years.
However, I believe that it is possible to approach the problem from the other end of the telescope and to recapitalise and reconfigure the system by reinventing "Equity" and indeed, "Capital" itself.
We may achieve this through extending by changing the form of Capital through the use of new legal frameworks, replacing the sociopathic "Corporation" with partnership and trust based alternatives, and replacing conventional "Shares" with new types of "Units".
Units redeemable against value such as energy or rental value are capable, I believe, of becoming the new forms of "asset-based" currency necessary, and exchangeable within a networked "International Clearing Union" similar to that proposed bY Keynes at Bretton Woods.
What is needed IMHO is to redefine "Equity" through a process of "Unitisation" and to execute a "Debt/Equity Swap" on a national and indeed international scale. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
That is the most maddening aspect of our current debacle. All efforts at present are directed towards preventing the inevitable losses to those who are most responsible for the problem. It is the most egregious example of which I am aware of throwing good money after bad. Well, to the extent to which there is any "good money" left in existence.
That response is entirely due to the nature of existing campaign finance. The authors of this disaster are still the dominant contributors to the process, so their interests will be protected first. The US government will suck dry all available wealth from those unable to protect themselves in a failed effort to save the un-savable. What a miserable bunch of dummies we all are. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
