Interesting throughout. Thanks to Mark Thoma for the pointer. I agree with much of Rajan says, so I want to highlight the sentence with which I agree the least. On the role of government in the housing market, he says

I think finding ways to slowly disengage the government in a way that you have a smooth change in prices would be a good thing.

I think that when you have bad government policy, “slowly disengage” is a recipe for perpetual crisis. When I was interviewed last night, the last question I was asked was about President Reagan. He defied those who argued for only “slowly” deregulating oil prices. The rapid deregulation worked much better.

I think that the same would be true in housing. If we got rid of all of the mortgage modification programs and mortgage subsidy programs tomorrow, the total pain involved would be far, far less than what we are inflicting on ourselves by trying to minimize the adjustment in the housing market.