> Deflation also pushes people with large home mortgages closer to the brink ... > thas the potential of making the housing crisis much worse for everyone.

The housing "crisis" happened because people were getting large home mortgages. There shouldn't be people with large home mortgages. I interpret "large" here as bigger than they can chew. If they can't afford their home, they can't afford their home -- time to scale down to a small condo or start renting. Why are we proping up people with large home mortgages and rewarding their stupid buying decisions?

Because they were unfortunately quite common, and not propping them up would put a large portion of the population out on the street, and cause a further surplus of homes on the market, driving values down further in a vicious cycle. The point is they could afford their home when banks lent them money at reasonable rates, when the bank assumed they could always resell the home and get their money back, but when the current appraised value of the homes dropped, banks were left holding much riskier debt, and charging much higher rates to existing customers with variable-rate loans, as well as those due for renewal. This has trapped a huge number of homeowners. The situation is even more troublesome in commercial real estate, as loans are for relatively short periods, after which they must be renegotiated based on current value, against a backdrop of commercial leases for tenants rapidly dropping in many cities. It's the scale of the crisis on so many fronts which has such potential for devastation of the entire economy.