“so if we all had nice houses that lasted forever we couldn’t be fully employed doing something else?”

But this is not the situation we’re in. A contractor knows that there will be a market for new houses and renovations again, so he’ll just sit around waiting out the downturn until there’s work for him. He won’t go out and learn a new skill.

Also, a big problem with housing is that homeowners have become immobile, particularly those who are underwater on a mortgage. If they are workers, then it is harder for them to move to where the jobs are.

Of course, my solution is different from Ivan’s. I would just streamline the foreclosure process to get delinquent borrowers out of their houses as quickly as possible. If you want to provide government assistance to them afterwards so they can get on with their lives, that’s a completely separate issue and something I would support, in theory. But we shouldn’t create a moral hazard by rewarding people for becoming deadbeats.

There was an article on Bloomberg today about how the housing market in the West is hotter than Georgia asphalt, and in the East, it’s moribund. The difference is the foreclosure process, which is mostly gummed up in the East (e.g. NY, NJ, FL – all “judicial” foreclosures states), in contrast to the “non-judicial” foreclosure states in the West (e.g. CA, AR, NV).

If the Fed really wants to make a difference, they should buy up the remaining $1 trillion in non-agency MBS and offer more attractive loan modification terms. They can also ask the banks to package their $4 trillion in raw loans and purchase those as well at par and allow for more aggressive modifications. The Fed would take a hit of about $1 trillion, something that can’t be done through fiscal policy in this environment. Whether or not you like the policy, it would put an end to the housing crisis, unlike purchasing agency RMBS.

http://ftalphaville.ft.com/blog/2011/11/25/765031/manufacturing-quality-collateral/

She’s done other writing on this issue and is a fan of warren’s work.