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The Geithner Housing Bailout plan has only highlighted what is essentially true about any form of government intervention in the markets – that there are winners & losers, and its basically fair/unfair depending on which group you belong. 

But there is one universal truth to the effectiveness of such plans, and it is that they should be simple and easy to understand.  One of the major benefits of a market system is its transparency and easy to understand signals (high price = sell, low price = buy, if you don’t value something at $500, don’t buy it at $500). So any assistance program with complicated rules (like the Geithner plan) is bound to fail with many people not taking advantage of it, and it will empower the middle-men (loan brokers) who have the financial incentive to interpret the rules and find loop holes. 

This is precisely how the whole derivatives mess happened in the first place, with the financial instruments being too complicated even for execs to understand, and the middle men (Wall Street quant jocks & loan brokers) making decisions that enriched them, but collectively took the economy down with them.

So my suggestion would be that the government should step into the market, but with more clear rules – they should set up a Resolution Trust Co. to just buy the houses that are about to go into foreclosure, and then rent them back out to the occupants on a long term lease. 

This would be similar to how a government take over of a bank or auto company might look like, where the government ponies up the cash and keeps the employees (occupants) and factories (house) , but wipes out the equity holder and basically takes over.  

The rent can be determined by market rates in the area, and the government can bascially sign itself a contract to own the houses until the housing prices in the area stabilize (or rise above a certain threshold), which would then stabilize housing prices because all these foreclosed homes would have a government guaranteed floor price.

Jason Furman – economic advisor to Obama, and acquaintance from my grad school days, if you see this please give it a thought!

As all modern economists (not dogmatic crazies) would agree, recessions are largely caused by behavioral shifts in expectations and consumer confidence.  The marginal investments and consumer spending that drive economies in & out of booms & busts are largely driven by how we collectively feel about the economy, rather than actual job losses or industrial contraction.  Its a chicken & egg – but feeling bad, worried, and fearful certainly will only prolong this recession.

But as Americans, I’m confident this will end soon, as we will collectively get bored with continously worrying & talking about “the economy”.  Just like the housing boom was all anyone could talk about for a long time, we will soon reach an overload of yet another bad news, and just start to spend & invest because we get tired of it.

What kept the Japanese in recession for so long was their (our) penchant for pessimism, and self-flagellation.  Even during the 80s boom, everyone secretly thought we would be punished for excessive consumption & land grabbing.  But Americans are not so puritanical or at least there is a good segment who will just simply tire of all this doom & gloom. 

This is the land of Disneyland & Hollywood.