The economy faces two separate problems: the downward spiral of home prices, which hangs over the financial markets, and the decline in aggregate spending, which could cause a deep and prolonged recession.

Home prices have already fallen about 25 percent from their peak in 2006, and experts say they must fall an additional 10 to 15 percent to get back to pre-bubble levels. But they could fall much further than that as a result of mortgage defaults and foreclosures. Further declines from the current level would increase the number of homeowners whose mortgages exceed the value of their homes, creating a strong incentive to default. Defaults and the resulting foreclosures would put more homes on the market, driving down prices even more.

Although home prices must get back to pre-bubble levels, Congress should enact policies to reduce defaults that could drive prices down much further. Direct help to the 12 million homeowners who already have negative equity in their homes could help to stop foreclosures. But it is important for Congress to go further and stop declining prices from pushing a large portion of the other 37 million homeowners with mortgages into negative equity, which could tempt them to default. The mortgage replacement loan plan that I suggested in June, essentially a congressionally enacted mortgage ''firewall'' to prevent prices from dropping too far, is one possible way to do that.

The only other way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well under way. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending.

A fiscal package of $100 billion is not likely to be large enough to revive the economy. The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more.

The president-elect should focus on developing a mechanism for identifying and funding spending initiatives that can occur quickly and that would otherwise not be done. While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand. Any plan to finance this spending by raising taxes, even if postponed, as Sen. Barack Obama has suggested, would hurt the recovery by causing affected taxpayers to cut their spending now.

Although the economy is facing severe challenges, the president-elect can turn the situation around by introducing legislation to deal with the downward spiral in home prices and with the declining level of aggregate demand. It is important that such legislation be enacted as quickly as possible.

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* MARTIN FELDSTEIN, an economics professor at Harvard University and an adviser to the McCain campaign, is president emeritus of the National Bureau of Economic Research.