But if the crisis stems from declining real estate values, why not stop them from declining? A spell of inflation would arrest the slide by pushing up the price of everything. As home prices stabilize, mortgage-backed securities would regain value, banks would get financially stronger, and loan officers would stop hiding in the vault.
Consumer spending would also revive. In the first place, those who want to buy new cars or remodel their kitchens would be able to borrow money to do so. In the second, people whose money is eroding in value would be motivated to spend today rather than tomorrow -- the opposite of the incentive when prices are falling, as they are today.
Unlike measures to bail out homeowners, inflation wouldn't spawn a new bubble by stimulating overinvestment in real estate. Home prices might rise, but other prices would rise still more, pulling investment away from the housing sector until the current glut subsides.
The best part of inflation is that it avoids the need for the government to embrace vast spending initiatives and micromanage capitalist enterprises it is not equipped to run. And unlike government programs, inflation doesn't last forever.
One of the historic evils of inflation is that by reducing the value of debt, it rewards borrowers while punishing lenders. But this time, both sides may gain from a rising consumer price index -- borrowers because their properties will be worth more than they owe, and lenders because their customers will find it easier to meet their obligations.
Once inflation has performed its useful role, it will have to be tamed. But the Fed has a lot of experience doing that. What it doesn't have is experience bringing the economy out of a deep recession or a depression.
Inflation is not a good thing, any more than powerful, toxic, nausea-inducing chemotherapy drugs are a good thing. But when you have cancer, the one thing scarier than the cure is the disease.