No sooner had the last federal tax rebate checks been sent out than Congress began debating the merits of a second fiscal stimulus package. Before going down that path, U.S. lawmakers should consider why the first stimulus package failed to jumpstart the American economy. In many ways, the current economic slump is quite different from previous cyclical downturns—which means that traditional monetary and fiscal policy solutions may not work.

Indeed, there is mounting evidence that the two primary economic shocks underlying our present malaise—the worst housing market bust since the Great Depression and the most wrenching credit crunch of the postwar period—are intensifying. And they are doing so at the very time that the U.S. economy is adjusting to record oil prices.

In recent congressional testimony, Treasury Secretary Hank Paulson correctly observed that the economy would continue to encounter “bumps in the road” as long as home prices were falling. Unfortunately, the annualized pace of decline in home prices at the national level has now increased to over 16 percent, a rate that we have not seen since the 1930s.

Recessions associated with housing or credit busts are almost always longer and deeper than the average recession.

Even more disturbing is this: against the backdrop of a record inventory of unsold homes and a rise in the annualized pace of foreclosures to 3 million homes, the housing futures market suggests that U.S. home prices may fall by another 15 percent before they hit bottom. This means that some 30 percent of U.S. homeowners could have negative equity in their homes by the end of this year. That would complicate the task of stabilizing the housing market, as a growing number of homeowners would have every incentive to walk away from their mortgages.

Since housing constitutes the main component of the average American’s wealth, Congress should be more focused on the housing market than on short-term fiscal policy fixes. Declining home values have already taken a harsh toll on consumer confidence, which has plummeted to its lowest level in 28 years. A further drop in home prices could drive consumer confidence even lower.

It could also wreak havoc on an already fragile U.S. banking system. Large loan losses and seriously impaired balance sheets have caused American banks to reduce their lending at the fastest pace in 40 years. Further loan losses will only exacerbate that process. Historical experience across a wide range of industrialized countries indicates that recessions associated with housing or credit busts are almost always longer and deeper than the average recession.

Rather than embrace quick fixes that are economically dubious but politically expedient, Congress should concentrate on stemming the downward spiral of the housing market. However, it must recognize that its initial foray into this area, under the leadership of Senator Chris Dodd (D-CT) and Congressman Barney Frank (D-MA), produced a housing bill that, according to the Congressional Budget Office, is unlikely to change the dynamics of the market.

After the Bear Stearns, Fannie Mae, and Freddie Mac bailouts, Congress should also take a long, hard look at the enormous cost of repairing a financial system that has been ravaged by years of egregiously poor lending practices. Hopefully, such an exercise might dissuade U.S. lawmakers from engaging in another bout of fiscal policy largesse to boost consumption in an economy that is woefully deficient in savings. At the very least, it might encourage Congress to concentrate any fiscal stimulus package on improving the economy’s crumbling infrastructure.

Desmond Lachman is a resident fellow at the American Enterprise Institute.

Image by The Bergman Group/ Darren Wamboldt.