A FEW weeks ago I argued, to the consternation of many commenters, that government intervention in mortgage markets might be warranted. My view was that home prices were likely to overshoot on the way down, with potentially catastrophic effects. Falling prices destabilise borrowers leading to default, defaults roil credit markets, and tight credit sucks any willing buyers out the market, perpetuating the downward spiral.

This diagnosis is gaining ground in the economic community, but proposed solutions continue to differ. In the New York Times today, Edward Leamer agrees that the market is in desperate need of buyers, and that lower prices and cuts in the federal funds rate are insufficient to deliver them. Mr Leamer goes on to suggest that a massive tax credit to first-time homebuyers--of something like $25,000--is needed. Colour me sceptical. While a tax credit of that magnitude would create a powerful incentive to buy, it would have little effect on markets if desiring buyers are unable to secure a mortgage loan. The credit would essentially lower home prices to new buyers by $25,000, but if low prices aren't able to solve the problem, as Mr Leamer says, then the subsidy is useless.

Meanwhile, John Makin of the American Enterprise Institute argues in the Wall Street Journal that significant action is needed now to forestall a collapse, generating massive government intervention--including, perhaps, the nationalisation of the nation's mortgage business. His prescription to the problem is inflation; money should be printed until real home prices are low enough to entice new buyers. I think Mr Makin neglects the extent to which Fed policy is already allowing this to happen, and I think he underestimates the pain that will ultimately result from squeezing inflation back out of the economy. He is right, however, that enough inflation will solve the problem. Crucially, the expectation of higher prices generally could influence consumers who now see home price trends as uni-directional.

It seems to me that cheaper and more effective options are available. Primarily, it would be nice to see an effort to orchestrate an end to unnecessary defaults, and secondarily, it would be useful to ensure that mortgage loans are available, at reasonable interest rates, to willing and qualifying buyers. Both of the above could be accomplished by allowing the Federal Housing Administration to provide affordable refinancing options to struggling homeowners (screened to exclude those who acted with obvious irresponsibility in borrowing), and to extend ready credit to new buyers.

If that still leaves the market with no buyers, then maybe other, more drastic, measures should be taken. For now it's clear that absence of credit is obstacle one to housing recovery. By all means, tackle that problem first.