Central governments have a rich history of stepping in during periods of extreme financial turmoil. Just weeks ago, the United Kingdom moved to nationalize Northern Rock, a struggling bank. And the feds jumped into the U.S. savings and loan maelstrom of the late 1980s, taking control of hundreds of bankrupt institutions.
But taxpayer-funded government bailouts are always controversial. While the Treasury Department is open to new proposals, "we're not interested in transferring risk from Wall Street banks onto the backs of U.S. taxpayers," says Jennifer Zuccarelli, a department spokeswoman. Former Treasury Secretary Lawrence Summers opposes government intervention at this point, citing "issues of equity...having to do with people who borrowed responsibly and rewarding people who borrowed irresponsibly." Dean Baker, codirector of the Center for Economic and Policy Research, suggests temporarily changing the foreclosure laws to give homeowners the option to stay in their homes as renters paying the fair-market rent. "This policy would not bail out the banks and doesn't cost the taxpayer a penny," Baker argues.
Others, like market strategist Edward Yardeni, say the Fed—which has acted quickly to cut rates—is still in the best position to stem the housing market's decline. And while he's pleased with the central bank's moves to reduce the federal funds rate from 5.25 to 3 percent so far, Yardeni says rates need to go even lower. "A 2 percent Fed funds rate could go a long way to stabilizing home prices," he says.
But in an election year, it would be naive to expect Congress to twiddle its thumbs as Americans lose their homes by the hundreds of thousands. Alex Pollock of the American Enterprise Institute is "virtually certain" that lawmakers will act—it's only a question of what they will do. And to ensure that government intervention is effective, Pollock suggests that policymakers study the lessons of the HOLC.
Ultimately, it's a confidence game. Overexuberance on Wall Street and, yes, Main Street got the country into the mess as M.B.A.'s and everyday folks forgot the adage that what goes up must come down. But if the markets and Washington can work quickly enough, the damage to the economy might just be stanched in time.