Ken Rogoff gives an excellent interview to the McKinsey Quarterly. I wasn't surprised by his emphasis on the housing market.
The Quarterly: Is there any way to accelerate our pullout from this contraction?
Rogoff: ... [U]nfortunately, there is no easy out. Perhaps the best chance would be to find a way to get ahead of the mortgage defaults--that is, to have restructurings and debt forgiveness, albeit with some kind of quid pro quo. That is very hard to do. But if there were a way to write down and forgive some of the mortgage debt, that would be money well spent. In ten years, we will probably end up forgiving a big chunk of it. As Carmen [Reinhart] has noted, this is a little like Third World debt that was carried on the books forever, even though it was a joke...
Beyond that, we need to think about long-run structural reform. Most financial crises have at their root very, very high leverage. To hit the nail on the head, I think we have to do something about the prevalence of nonindexed debt instruments. I would start with changing our corporate-tax law and any overt incentives that favor debt. Obviously, the US home mortgage tax deduction makes no sense, given the risk that debt entails. I understand the political imperative, but let's not subsidize debt in an overt way. I think public-finance experts need to methodically go through the system and strip debt subsidies out.
Alan Blinder's new column in the Wall Street Journal also focuses on housing.
There is no silver bullet; we need different remedies for different types of (actual or prospective) foreclosures. And to succeed, we must overcome the three barriers. Foreclosure mitigation is expensive. It will encounter political resistance. It probably requires bending some property rights. Not very appetizing. But remember, the alternative may be continued stagnation...
He wants Fannie and Freddie to lead the way on refinancings; he proposes a big new effort aimed at principal reductions, with some sharing of equity; and he says the government should lend to investors willing to convert foreclosed properties into rental units.
Housing, housing, housing.
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