Are we targeting the symptom or the disease?
You've heard me say here that many of FDR's schemes were lunatic and probably helped prolong the depression. (If you're a liberal, you have probably spent more than a little time in the comments screaming that I'm a heartless and innumerate fool who wouldn't know good economic policy if it bit me in the aggregate demand.) But of course, some of his policies actually helped the depression, like the FDIC. Some of them did nothing about the Depression, but were good for other reasons, like (I'd argue) the WPA. Some of them were possibly unwise, but not horrific; the TVA comes to mind. And some of them were disastrous, like the NRA and the attempts to drive up the price of gold through open market purchases.
What distinguishes the worst programs? Assigning a causal role to symptoms. FDR's economists had noticed that when the price of gold went up, so did (generally), the price of other commodities. Some lunatic suggested that one might raise the price of commodities which were currently in big trouble by driving up the price of gold, and FDR tried it. Gold and commodities tend to rise in tandem, of course, because demand for money (which gold then was), and for gold as an industrial and jewelry uses, expands when the economy is booming, as do demand for food and oil and all other good things.
Similarly, some bright boys in FDR's administration noticed that wages and prices tend to rise in boom times. Hence, they decided that by keeping wages and prices high, they could bring back prosperity. The National Industrial Recovery Act attempted to organize the economy into giant wage-and-price fixing cartels of industry and labor.
The result, in a time of contracting demand and deflation, was to create more unemployment and deprive consumers of goods.
I wonder if the policy community's current fixation on propping up housing prices is not akin to these plans. Prices of houses are contracting as a result of the collapse of a credit bubble--but are falling house prices a cause, or a symptom? Europe's experience seems to suggest the latter.
Thus, I naturally wonder if fighting to keep the housing market from falling might, like the NIRA, actually make things worse. I'm still thinking through the implications of exactly how it might disimprove our current nasty disequilibrium--though shutting out new homebuyers is surely part of it. But it's something to worry about that no one I see is much worried about. A lot of people are grousing that it won't work, but very few are complaining that the act of propping up prices might, by itself, worsen the housing market and the general economy. Am I crazy?