William Buiter of the Financial Times (and London School of Economics) is establishing himself as the most acute commentator on the financial crisis. His latest is: Home loans in the US: the biggest racket since Al Capone? (The answer is "yes" -- he concludes with the quote in the title of this post.)
The solicitude for home owners does indeed hide a fundamental truth: home owners for a generation, and with the total encouragement of the federal government, have been speculators who relied on leverage to earn outsize returns.
In a world of stable house prices, a mortgage is a way of spreading the cost of your purchase of the consumer good "shelter" over years of your working life.
In a world of rising house prices, mortgages are a way of using other people's money to earn outsize returns. For example, if you buy a house for $1 million cash and it doubles in value over 10 years, you have made a reasonable but unspectacular 7% annual return. Ah, but put down $100K and borrow $900K, and the double in the house price gives you a gross return on your downpayment of 1,000%, minus the interest on the mortgage, which was tax deductible. So if you had a 6% mortgage, the increase in value of 7% per year meant you were netting about 35% a year on your $100K downpayment.
About four years ago, I thought house prices were too high, so I cashed out my successful speculation and sold to a new speculator. Now, their bet having turned out less well, I as a taxpayer am supposed to bail them out. But, unfortunately for me, I put the sales money into stock index funds, which are now down 50% from their highs. So why am I supposed to bail out the purchaser of my house, which has not declined in value by nearly that much?