In yesterday’s post I mused at the end about the effects of the $700 billion “bailout” plan. It’s hard to believe it was just last week that was passed -- it seems like eons ago. Since then, central banks around the world cut interest rates, the Fed promised new infusions of cash, and the government increased the amount it would give to AIG. 

Yet none of it seemed to make any difference. The Dow closed at 8451 today -- down 18.2% just this week. Other broad stock market indices fared similarly poorly. That represents total year-to-date losses of 40%. Tums, anyone?

So I went looking for some kind of answer -- surely someone has a brilliant idea for a plan that will actually jump-start the market, right? 

Along the way, I found some really wacky ideas I just had to share with you.

In a New York Times blog earlier this week Harvard economist Edward L. Glaeser wrote about “why we should let housing prices keep falling.”  Okay, so his ideas weren’t so bizarre, but a Wall Street Journal piece he referenced was completely, totally out there:

“Washington has practically monopolized the business of financing and refinancing home sales for willing buyers and sellers, but it does nothing about the homes going rancid on the shelf, souring the value of the nation's entire housing stock and mortgage debt.

 “Maybe that explains why we're finally getting some takers for a demolition strategy as the least-cost route out of the subprime mortgage aftermath. The Economist, in its July 10 edition, endorsed a ‘wrecking-ball response.’ Bill Gross, the Pimco bond king, says in an ideal world Washington would ‘buy one million new/unoccupied homes, blow them up, and then start all over again.’”

Okay, so I’ve been posting all along about how the excess supply of homes has depressed housing prices. That’s basic supply-and-demand economics. But my logical solution, in my own non-economist brain, was to wait for demand to eat up existing supply and then watch housing prices strengthen -- not to blow stuff up.

I’m confident in my solution, for two reasons:

1) Between 2005 and late 2006/early 2007 rapidly rising home values had priced many Phoenicians out of the housing market (unless they took out those crazy mortgages I’ve been blogging about. . .) As prices have fallen, more Phoenix residents are finding, once again, that they can afford a new home. Those new entrants to the housing market increase demand for homes.

You can already see that the number of home sales have spiked this year. (Below is a chart from my October newsletter. E-mail me at bob@myphoenixmls.com to sign up.)

2) During the housing boom, builders had pie-in-the-sky plans for the number of houses they would build. They bought enormous tracts of land in developments all over the Phoenix area, perhaps thinking that the boom would never bust. But even after bust it did, the builders were still holding their land, often paying interest on the debt used the finance those land purchases. So they kept building, even as prices were falling.

But once the bubble burst, the builders stopped buying new land. So once they build out the homes on the land they already owned, they can take a breather. A slow-down in home building (which we’ve been seeing in declining housing start figures) will mean that new buyers will have to look to already-built homes. 

So 1) rising demand + 2) even (or, at least, more slowly increasing) supply = increasing prices.

Disclaimer: That is assuming, of course, that the financial markets don’t kill us all first.