The role of the dysfunctional US housing market is one of the fascinating parts of this global meltdown. What is it about the US that created the meltdown? What are the unique features of that market?

Some interesting insights in a Bank for International Settlements working paper The housing meltdown: Why did it happen in the United States?

According to the author, Luci Ellis, the US housing market was very different from other parts of the world and there were unique conditions that created the boom and subsequent bust.

First, there is the US tax system which, unlike other parts of the world, allows interest on mortgages for owner-occupied homes to be deductible against income tax. The imputed rent from owning one's home and not paying rent to a landlord is likewise free of tax. You just don't find that in other countries. The intent of the tax rule is to encourage more people into home ownership, which contributed to the boom-bust problem. More to the point, the US tax system encourages people to take on monstrous amounts of debt. Secondly, all the financial regulation in the US was totally useless when it came to preventing riskier loans. And finally, there was the unique role of securitisation which encouraged subprime lending.

The big question for the US now is whether the egg can be unscrambled. Given that this is unlikely to happen, we might well be looking at years of difficulty and slow growth.