Vernon Smith proposes that in a world of imperfect policy choices, but within the reality that a choice will be made nevertheless, that rather than a scattershot fiscal "stimulus" we would do better to target households and in particular the problem of homeowner negative equity.
Before commenting, remember that Smith agrees that policies that bailout anyone (banks, firms, households, etc.) are problematic. He is discussing a policy choice within the context of choosing the least bad option, and not the first best possibility.
I disagree that the "recalculation" process will necessarily be long and result in the destruction of wealth creating opportunities, just as I disagree that the Great Depression provides evidence on the "recalculation" process, rather than what happens when government continues to attempt to off-set that "recalculation" process. But I also understand that this historical interpretation is an on-going debate among economists and historians. I imagine that the Great Recession will also be the subject of an on-going debate for decades to come, just as the collapse of communism and the failure of development planning are subjects of heated debate.
First, what do you think about Smith's proposal within the context he proposes it? Second, what do you think is the best way to tackle the thorny empirical issues that would address the historical narrative in a way that might move the debate over both the Great Depression and the Great Recession toward resolution?