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At what point will politicians, Fed, Treasury and even the real estate industry admit that throwing money at the housing industry isn’t going to improve it? Despite tax credits, subsidized housing agencies and mortgage tax deductions, the deleveraging of the American housing sector will not be deterred. So it’s time for everyone to take a deep breath and try a bold new strategy:

Do nothing.

Forget about the contradictory charts, reports, media and analysts. If any other sector of the economy were reported on with such daily deviation, the public would conclude that someone was drunk. Imagine news reports saying automobile sales were soaring Monday, falling Tueday, flat Thursday and soaring again Sunday – all in the same week. That’s exactly what you get on the real estate pages of most newspapers and websites these days.

The analytical confusion breeds policy confusion over what to “do” about housing: Should we try a third tax credit policy, though the evidence from the first two attempts merely kicked the correction-can down the road. Another TARP won’t work, since the big banks are healthy again, having paid their loans with interest. Giving them more money to offer in 4% loans won’t create buyers to actually borrow it. Besides, banks are perfectly happy borrowing from the Federal Reserve at 0% and lending to the Treasury (buying bonds). With such a neat no-risk way to make a profit, what bank would even think about getting back into housing?

This leaves the political hacks and industry PACS to come up with the next feel-good measures. The latest proposal includes lending money – at no inteerst – to underwater homeowners who are also unemployed, so they can pay a mortgage they cannot afford.

Brilliant.

Now, such challenges might lead one to believe there is nothing to be done to help various housing troublespots in the country. (Note that not all housing markets are in trouble or all home owners underwater). In fact, after billions of dollars, and dozens of programs, will nothing work?

Exactly!

Nothing is exactly what we need. More accurately, doing nothing else to distort or delay the market correction, no matter how painful or disruptive. Doing nothing has worked before: we’ve been through asset bubbles, dot-com manias, equity explosions, and credit-fueled consumption by irresponsible before. Pardon the pun, but the house of cards has collapsed many times over the centuries. And it came back into shape without any help from then-nonexistent Federal reserves, mortgage tax deductions, housing subsidies or tax credits.

And usually within a single year.

When the market was left to correct itself throughout the 19th century, different recessions for different reasons all recovered within about a year. That’s because the people closest to the right information – and therefore the right things to “do” were consumers. Not politicians. And consumers know that doing nothing is the best policy for speeding a recovery out of a recession.

Consumers know how to do nothing – like spending less in order to increase household savings, as protection against further downturns. Such savings also get directed into productive activities by other consumers, called job-creators. But mostly, doing nothing means putting off large and discretionary purchases – like a home.

That’s why so many are renting just a little longer today, or staying home with mom and dad, or just waiting. Doing nothing is exactly what the market needs to get the proper information flowing about supply and demand.

Doing nothing takes time, which is terminal for politicians and sometimes difficult for the real estate industry itself. But consumers have a lot to reconsider as a result of the past ten years. It takes time for them to figure out what the future landscape, upon which their homes will sit, will look like.  They must try to anticipate unemployment rates, tax rates, insurance costs, energy costs, food prices, college tuition, etc., none of which will be like they were in the middle of the last decade. Which is exactly why they cannot buy and sell homes like it was then, either.

Doing nothing let’s them evaluate all factors, and possibly conclude that housing prices need to fall before they can afford to come back into the market. It’s not just about mortgages and tax deductions any more.

None of this can happen if policymakers keep trying to do “something.” Until we admit that housing purchases are discretionary, we won’t understand that sometimes there’s nothing to actually “do” when the absorption rate falls some years. Remember, there’s no necessary requirement to purchase a home, compared to other products such as food or energy. And since there’s sufficient stock to accommodate the housing needs of nearly everyone, there could be a lull in housing volume for quite some time. Some consumers might decide to buy more iPads than a new pad. Maybe a rise in renting, roommates, multi-family housing or buying a more modest home for the time being, but so what? Our parents and grandparents did it for the better part of the last century.

But it is  is ludicrous to believe that a deleveraging consumer trying to predict the economic landscape of the near future wants its government to push the prices of housing prices up. And that’s what any government program is almost certainly going to do.

The only reason to “do something” is emotional. We’re a  society that doesn’t like the fact that some times are tough and some people have to feel pain. Our laudable tendency for social compassion has become complete avoidance of any problems, along with political and financial absolution for any mistakes, even the ones we bring on ourselves. Unfortunately, social compassion isn’t an economic policy. Good emotions often lead to bad market interventions and unintended consequences that mostly make things even worse.

Even those who thought they were “on top of it all” during the boom have learned that the fruits of government interference eventually attract fruit flies. The last thing we should be doing now is letting the short-sighted cooks in government back into the kitchens of our housing market.