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I think that you may be right; the point is, we don't know at this stage. In most parts of San Diego, $700,000 houses have not gone down to $500,000. More like $600,000. In some places, like Temecula and Chula Vista, maybe it has gone down that much, because they were overbuilt, new and sold to people who had no business in those homes. So, the huge number of REOs has brought prices down more than otherwise would be the case. Flush those REOs out, and it will be more like established neighborhoods with working families.

So, using the $700k house as an example, it is more like $600k now, and could drop to $450-500k if we go to 2001 or earlier. $300k would not make much sense, unless we have a major, major depression. A short term recession would not have such a devastating effect.

Once the REOs are washed out, we will have a bottom. A year or two later, when excess inventory and delayed selling is cleared out, prices can start going up again. Then, they will retrace to 2004 or so, which is when prices got out of hand. That $700k house will go back to $600k and rise with supply and demand.

So, a solution that gives the homeowner a low-interest loan at $600k would work for everyone.

The capital gains tax holiday is a good idea. One other notion that I haven't seen talked about--why not let banks with huge losses transfer those losses to entities (not just banks but any corporation) that have huge gains? The bad banks get a HUGE injection of capital, and taxpayers don't have to directly fund their survival. The indirect cost is a loss of income to the treasury, but that is better than actually printing money from the treasury to the banks, and the benefits to the macro economy will increase tax revenue.

So, Exxon pays $10b to WaMu for its $20b of losses, coming out even at its 50 percent marginal rate. Wamu is swimming in new capital, Exxon comes out even, and the treasury is out $10b in possible tax revenue, but doesn't have to buy WaMu's bad loans, or own a bunch of foreclosed properties. Has this been discussed, or is it not an option for some reason I haven't thought of?