Richard Goettle, a lec­turer on eco­nomics and finance in the Col­lege of Busi­ness Admin­is­tra­tion, has written a plan with col­league Eliot Sherman on dealing with the mort­gage crisis. They have sent their plan to the pres­i­dent, to con­gres­sional com­mit­tees and to the media.

What do you think of Obama’s housing plan?

It is a much needed begin­ning that pro­vides $75 bil­lion in direct help to dis­tressed home­owners and up to $200 bil­lion in restoring the health and well­being of mort­gage lending. My con­cerns are that it is too small, too slow, too nar­rowly focused on government-​​sponsored Fannie Mae and Freddie Mac, and too unwilling to deal with the increas­ingly defla­tionary dis­con­nect between actual home values and mort­gage principals.

What would you do differently?

My col­league, Eliot Sherman, and I have a plan in which pri­vate investors fund a much broader restruc­turing of dis­tressed mort­gages in a way that afford­ably keeps people in their homes while not absolving them of their orig­inal com­mit­ments. Our plan also strips bad housing-​​related invest­ments from and restores equity to trou­bled finan­cial insti­tu­tions as it spreads the ben­e­fits of a housing market recovery across the broad spec­trum of home­owners, investors and tax­payers. Solving this problem requires dealing directly with the mort­gages and their prin­ci­pals, inventing poli­cies in which broadly shared gains obvi­ously and sub­stan­tially out­weigh shared costs, and pro­moting part­ner­ships among all stake­holders so as to achieve a mean­ingful scale.

Has the gov­ern­ment waited too long to address the fore­clo­sure problem?

Absolutely. Evi­dence of this looming problem appeared as early as 2006 while, insti­tu­tion­ally, the spec­u­la­tive bubble in housing con­tinued to be fed. When it burst, as it inevitably would, the spillover effects were shocking in terms of their speed, depth and global reach. The prob­lems deserved prompt and com­pre­hen­sive action.

The Fed­eral Reserve and the fed­eral gov­ern­ment have com­mitted tril­lions of dol­lars to stim­u­late the economy. Why hasn’t the economy responded?

The money has yet to be pro­duc­tively “spent.” Only $350 bil­lion is cur­rently in play and much of it remains as cash and new Trea­sury pur­chases on insti­tu­tional bal­ance sheets. The fiscal stim­ulus sched­ules $185 bil­lion for later this year, $400 bil­lion in 2010 and $135 bil­lion in 2011 with smaller amounts to follow through 2019. The remaining $2 tril­lion exists only in the forms of guar­an­tees, promises and informal con­cepts and has yet to flow. How­ever, we’ll be spending 6 to 7 per­cent of our Gross Domestic Product annu­ally for the next three years so it’s hard to imagine it not having an even­tual pos­i­tive impact.

What’s needed to fix the banking system?

No more “bailouts.” Those banks that are tech­ni­cally insol­vent should be broken up and allowed to fail. In the U.S., we have an excel­lent system with a diverse array of policy alter­na­tives for dealing with failed finan­cial insti­tu­tions. We per­haps should replace “too big to fail” with “too big to exist.”