So far, nothing the government has tried has done much to stabilise home values or stem the wave of foreclosures. Fortune asked around for three fresh fixes from the private sector. What’s funny is that the first two don’t seem very private sector at all, and basically amount to what we’ve tried before (and what got us into this mess), more government subsidies:
- The former CEO of homebuilder Pulte Homes says government should just assume part of homeowners’ monthly mortgage payments: “If a homeowner is currently paying 8% interest, he says, the government could contribute 3% – thereby lowering the homeowner’s payment to 5%.”
- Finance prof. Jack Gutentag says the government should encourage private firms to write insurance on diminished cash flows, but then have the government backstop the losses these firms face: “The government would backstop the insurers, by covering the first 10% of insurance losses over three years and half of all losses afterward. Like the Grosfeld plan, this concept would bolster the value of mortgage-backed securities, reducing the stress in the financial system.”
However, here’s the really novel, private sector one
- “A third approach is outlined by Dean Baker, co-director of the centre for Economic and Policy Research in Washington, D.C. He says the key to stabilizing house prices is to allow them to fall to their long-term trend, as determined by a multiple of annual rent payments. ‘Bringing prices back to their trend level is the most effective way to boost demand in the market and to begin to reduce the record vacancy rate,’ he writes in a recent paper.
Crazy huh? Let prices stabilise. Let supply and demand do their thing. You know we’re in uncharted territory when a well-known liberal economist like Baker is the one proposing the laissez-faire approach.
Besides, we might not be as far from the end as we think. Sam Zell thinks the crisis has peaked and that things will get better by the middle of next year. And there’s evidence that the hardest-hit regions, California and Florida, are starting to see an rise of carcass-nibbling vultures. It’s not there yet, but if the goal is to get stabilisation, rather than a spike to their highs a couple years ago, then the end may be in sight.