The essential argument here is that these things don't have enough value as it is, so let's completly destroy their value. Of course the purpose is to increase the value of the remaining homes in a straightforward application of supply and demand; if demand remains constant, while supply diminishes, prices will increase.
There are numerous problems with this proposal, all of them ignored in the article. First, low prices are not inherently bad. In fact low prices are very very good for people with low incomes. That's why Wal-Mart is good, not bad. The current mortgage crisis is only a crisis for those who loaned the money. It's not even a crisis for people who can't pay their mortgage--loss of income is their crisis, and they are the cause of the lenders' problems. A lender's pinch is not the debtor's problem. Of course if all credit disappeared, it would be the (prospective) debtor's problem, but that's not the case here; mortgages are still available. Which is why this is also not a crisis for potential home-buyers--in fact the decline in housing prices is the greatest thing possible for them. The solution, apparently, is to f*** over the less well-to-do in order to protect a particular set of businesses. I'm not sure how many of the classical economists would have approved, but I think the one finger I would raise for this proposal would be generous.
And then there's the bigger question of the collective value of housing. Granted that the price of many houses has already fallen by a third or more, would the elmination of the remainder of their value enhance the value of the remaining stock enough to offset that loss? That is, would the wealth of America actually be enhanced by this proposal, or would it be diminished? Although tighter supply would definitely increase the value of the remaining houses, the destruction of nearby properties would have a negative effect that would offset at least some of the increase. Neighborhoods where homes have been destroyed by fire and not rebuilt, for example, rarely exhibit substantial increases in home price. Now if the government wants to undertake the expense of removing all rubble, filling in the basement if there is one, sodding the area, and then giving it to the next door neighbor to double his/her lot size, we might be on to something.
But even in the best case scenario, this proposal ignores the root of the problem. Mortgage firms gave increasingly risky loans, that now they can't recover. The reduction in home prices doesn't mean they can't resell the homes--it means they can't resell them at a high enough price to recoup their losses. (And of course those higher prices were in part a product of their incautious lending.) That's what makes markets preferable to governments, people who make bad financial decisions reap the consequences. The pain of the resultant loss is the only thing that constrains people from repeatedly engaging in foolhardy business transactions. Any government bailout, regardless of how it's structured, lessens that pain, and reduces the incentive to not be foolish in the future, thus increasing the chance of "needing" to bail them out again. It's an exceptionally simple case of moral hazard, and the long range outlook is that the future foolishness, and its attendant bailouts will cost us more than will letting the current losses stand.
Perhaps it's revealing that the author, Holman W. Jenkins, Jr., writes a weekly column titled "Business World," rather than "Economics World." It could almost have been Jenkins himself to whom Smith was referring when he wrote:
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.