This simple truth is that it was housing that started to whole collapse and it will be housing which solves the problem. It is this sector which accounts for roughly 10% of the GDP in the United States. Until this aspect of the economy is stabilized, nothing will be effective.
We heard a lot about the toxic assets that banks have on their balance sheets. That is at the core of the financial collapse. However, we are nowhere close to solving that problem since there is still no way to value these assets. At the moment, they are virtually worthless. Putting a stop to the housing crunch will establish a basic value for these assets while stopping the downward plunge.
Now, many citizens are opposed to bailing out their neighbors when they paid their mortgages. The idea of rewarding someone for bad behavior is unpalatable to many. I will cede this point to them. However, the situation is such that their choices are affecting everyone, even those who paid their mortgages on time. Whenever a house is foreclosed upon and sold at auction, it brings the value of everyone else in that neighborhood down. Multiply this by millions of homes across the country and you get a glimpse of what is happening.
Therefore, bailout the million or so homeowners who are facing foreclosure. Get the housing market stabilized so that prices are not dropping 1%-3% a month. This will give some value to the banks assets while freeing up some credit. Those who maintained creditworthiness can refinance their homes if they so desire. Also, the slowdown in construction will turn within 12 months if the Fed holds interrest rates low.
And, in the end, this will cost a lot less than a couple of trillion dollars that the politicians are going to spend over the next couple of years in wasteful spending.
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