Obama's last hope

- That is, the $77 billion housing equity fund could be used by the government on a recycled basis to reduce the risk of families facing foreclosure in perpetuity (as opposed to the current once-off “cash splash”). And since traditional lenders are avoiding foreclosure and the associated losses, there is an argument for them to contribute to the plan in the longer-term.

- The performance of this first generation equity portfolio would help build the foundations for the development of a wider market in private equity finance that could reduce the risk of excessive household leverage in the future. In particular, the returns realised on these loans and the timing of the cash-flows would resolve many questions that have prevented these markets from emerging previously. And definitive resolution of the tax and legal treatment of these instruments as part of the plan would remove one of their key impediments in the US.

Private and publicly-funded markets in housing equity now exist in Australia, NZ, and the UK. Indeed, Australian research and practical experience have been explicitly used as a guide for several billion dollars worth of government investment in public-sector shared equity initiatives in the UK and NZ, which are helping thousands of families deleverage.

Combined with the fact that leading US academics, including Ian Ayers and Barry Nalebuff at Yale, Luigi Zingales at the University of Chicago, Edward Glaeser at Harvard, and Andrew Caplin at NYU, have all recently made similar calls for the US government to help borrowers swap a portion of their housing debt for equity, it is hard not to acknowledge that there is immense merit to this plan.

Nobody has a monopoly on good ideas. And nobody would begrudge the Administration for seeking to refine their solutions to this calamity. I just hope Larry Summers, Shaun Donovan, Timothy Geithner and Austin Goosblee have the humility and foresight to listen. Because guys, what you are currently proposing to implement will almost certainly set the US economy on a long-term course towards permanent irrelevance.

If truth be known, I feel helpless because I doubt very much whether they will listen. I have been told by influential US stakeholders that it is all too late. And it distresses me deeply to see the much-vaunted Obama Administration make precisely the same ill-conceived and vested missteps as its predecessors.

But let me be clear - the debt for equity swap program outlined above is the only hope US policymakers currently have of marrying long-term relief for distressed families with much more fundamental reform.