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For months now the Treasury and the Federal Reserve Board have been trying everything they can think of to stabilize the financial system and prop up the economy. You can criticize them for many things -- for the regulatory failures that let this unfolding calamity happen in the first place, maybe for the slowness of the initial response, and certainly for the failure even now to devise a coherent, intelligible plan for financial intervention. But you cannot accuse them of timidity or of idly standing by.

In a frenzy of initiatives, they have committed trillions of dollars in various kinds of public support for banks and other financial institutions. Further huge outlays, including a second fiscal stimulus, are on the way. Nobody is any longer denying the gravity of the situation; just the opposite. Yet one critical aspect of the problem has barely been addressed -- the still-rising tide of home loan delinquencies and foreclosures.

Many commentators argue that the housing market needs to be left alone to find its floor. But this is a mistake.

Everybody understands that this emergency began in the housing market. Falling house prices caused panic and then paralysis in the market for mortgage-backed securities. As the value of those assets tanked, the soundness of the banks and other financial firms that held them came into question. As confidence in the financial system collapsed, banks were unwilling to lend even to each other, let alone to ordinary personal and corporate borrowers. The stock market crashed; people saw their savings disappear; consumers stopped spending. The economy stopped treading water and sank. And it is still sinking.

Even though the emergency has now broadened -- to almost every corner of the U.S. economy and across the world -- housing is still at the center. As long as house prices continue to fall, more and more families will find that they have negative equity in their homes (in other words, their outstanding mortgage debt is greater than the current value of their house). The number of delinquent loans will keep rising, and so will the number of mortgage foreclosures. It is a vicious circle, because foreclosures drive house prices lower still. While this goes on, fiscal stimulus or no, a broader economic recovery will be difficult to engineer. The value of mortgage-backed securities will keep sinking, the panic in financial markets will persist, lending will fail to revive, and households will keep trying to retrench.

In the first half of this year approximately 1.2 million mortgages were foreclosed, almost as many as in the whole of 2007. The total for this year will be more than 2 million. In 2009, as incomes are squeezed and unemployment rises -- and as many of the adjustable-rate mortgages granted to subprime borrowers in 2007 reset to higher interest rates -- expect perhaps another 3 million foreclosures.

Before the scale of the later financial breakdown was even suspected, Congress and the Bush administration were looking at ways to help distressed homeowners, and schemes to encourage lenders to modify loans (by deferring payments, lowering interest rates, or forgiving principal) began to be put in place. But so far their effects, in relation to the size of the problem, have been small, and delinquencies are still rising much faster than the number of loans being adjusted. Also, a lot of the loans that have been modified are falling back into default, because the new terms were not generous enough to make the loan affordable or (in the case of negative equity) to give the borrower a reason to keep paying rather than walk away.

In its first six weeks of operation, one new program -- HOPE for Homeowners, which started at the beginning of October -- received applications to modify barely 100 loans. Other efforts, public and private, are under way, but progress is slow.

Why has it been so difficult to modify loans on the necessary scale? In principle, it should be easy. Foreclosures make lenders as well as borrowers worse off. Some estimates say that lenders typically lose half of the value of their asset when they have to recover what they can by selling the house. That leaves plenty of room, you might think, to modify the loan and make it more affordable, while still leaving the lender better off than under foreclosure. In many cases modifying the loan ought to be win-win for borrower and lender alike, even without a nudge from the government.

Mortgage securitization has made things much more complicated, however. The companies that service mortgages, and that would oversee the modification, are worried about being sued by the investors who own the securities. Also, servicers often are not paid for arranging a modification (which is a labor-intensive process if done on a case-by-case basis), whereas they are usually reimbursed for the costs of foreclosing. Second mortgages and home equity lines of credit further muddy the process.

More must be done, but the politics is awkward. Taxpayers are reluctant to bail out reckless lenders and borrowers. Many commentators also argue that the housing market needs to be left alone to find its floor. Efforts to hold prices above that level will only delay the needed adjustment and prolong the agony, they say. But this is a mistake. There is no fixed floor for house prices: How far they fall depends partly on what happens in the rest of the economy, and vice versa. If the vicious circle of falling house prices and rising unemployment can be broken, the floor will be higher than if the government lets prices and demand follow each other down. Taxpayers at large have an interest in braking the decline.

Sheila Bair, chief of the Federal Deposit Insurance Corp., has been arguing for a while now that a modification scheme her agency is using with customers of IndyMac, a failed bank that the FDIC took over in July, should be extended across the industry. The plan aims to cut payments to an affordable proportion of borrowers' incomes using a period of interest-rate relief, extended repayment terms, and possible deferral of principal. The approach cuts through some of the red tape by allowing a standardized modification offer to be sent to distressed borrowers. It seems to be working, and some big private lenders, such as Bank of America and Citigroup, are following suit.

Bair has proposed a big extension of this plan, broadened to cover securitized mortgages and sweetened with public money. Servicers would get $1,000 per modified loan, and investors would be compensated for half of any losses on loans that redefaulted after being modified. In all, she has said, this could prevent 1.5 million foreclosures at a taxpayer cost of some $25 billion. These days, that no longer seems like a lot of money. The idea has other problems, though. Can servicers act without investors' permission? Bair says yes, in most cases; others dispute that. And because the help would be confined to delinquent borrowers, wouldn't the plan encourage more people to default? Maybe, in which case it would cost more. In any event, the Bush administration, for reasons it has not spelled out, has been unenthusiastic. The Obama administration would likely be more receptive.

I think it is worth a try. And so are two other things. First, the law should be changed to let bankruptcy courts modify mortgage loans in the same way that they can restructure other debts. This is good policy in its own right: Logically, there was no reason ever to treat mortgages differently from other liabilities. (The idea was to encourage mortgage lending to borrowers with less than perfect credit; this, I dare say, is an idea whose time has passed.) It would complement Bair's scheme as well, giving servicers and investors an extra incentive to modify loans before borrowers filed for bankruptcy and gave that task to a judge. And it would cost taxpayers nothing.

The second thing is to support the demand for housing. Reducing foreclosures would curb the excess supply of houses coming onto the market, and would do something to arrest the drop in prices. Boosting demand would reinforce that effect. How to do it? Economist Allan Meltzer has suggested that in 2009 homebuyers be allowed to take the value of their down payment as a tax deduction. "Increased housing demand will work to stabilize prices, not immediately but sooner than would otherwise occur," he says.

These proposals are not an alternative to a big new fiscal package. As I have argued in previous columns, a very large stimulus -- of $500 billion or more -- seems justified in view of the startling rate of contraction in the economy. But it also makes sense to pay particular attention to housing. Whether the government uses unspent funds from the Troubled Asset Relief Program to pay for these ideas or whether the money comes from a new fiscal stimulus is for bookkeepers. Whatever. The cost of an FDIC-style plan for subsidized modification of loans and a temporary tax incentive for house purchases would be money well spent.