Here’s what I propose:
1. Bring down the cost of housing by forcing foreclosed properties back on the market. Higher property taxes on foreclosed and vacant properties would help do the trick. Requiring prompt auctions for foreclosures could help do it too.
2. Streamline the bankruptcy process for insolvent housing related companies. The companies wouldn’t stop operating or layoff large amounts of workers. Ownership just has to pass quickly from stockholders (or partners) to creditors. We shouldn’t allow them to continue making decisions only designed to increase the amount of money they extract before leaving a greater financial mess in the end.
3. Establish efficient guidelines and processes for renegotiating loan terms as housing prices decline. We don’t want to compound the problem by encouraging more walkaways. Neither do we want to create a situation where lenders or borrowers can take advantage of each other. A person who has taken out a $500,000 loan on a $300,000 home should probably be allowed a quick and easy way to cut the size of the loan down to $350,000 or so.
4. There are many other side issues that would develop from falling property values that would need to be addressed from a public policy viewpoint geared toward efficient use of resources.
It’s no coincidence that all my proposals benefit average people most and bankers least. It’s no surprise that high profile politicians are more likely to propose solutions that benefit the banking industry the most. The reality, however, is that plans that help the banking industry utilize resources inefficiently and usually make the problem worse down the road. Bringing down the cost of housing to what a normal market economy would bear in the current situation would have a great many side benefits throughout the economy.