Claire asks me:
If one is going to throw a huge pot of money at solving the crisis, is there any way to give it to anybody ‘lower’ in the chain?
Ideally we could send money to anyone about to default. The obvious problem is that everyone would then pretend to be in that position.
So I have a modest proposal. The Fed/Treasury can identify those parts of the country with the most foreclosures. They can buy or confiscate empty homes in those areas and destroy them. That will raise the price of the remaining homes. Anyone who is otherwise about to default could then sell the home at a high enough price (fingers crossed) to get out of the deal alive. This would stop home prices from falling and it would limit the number of future defaults.
Buying the current already-foreclosed homes also would recapitalize the banking system but if you wanted to punish banks (not my goal) you could just seize the homes. Of course the elasticities may not work out in such a way for this plan to forestall financial disaster but I’ve heard worse ideas.
And if you want to save the homes from outright destruction, you could offer 20-year, no-resale residencies in the homes to some group that won’t otherwise be buying an American home. Alex suggests offering the homes to potential immigrants ("have I got a deal for you…") or how about giving away the homes to current low-asset recipients of Medicaid? Dealing the homes away in the right manner could win back some money for the government or help out others in a very humane way.