The standard Keynesian policy solution is for the federal government to increase its spending. It could cover state deficits and save teacher jobs. Or it could hire people to build new energy infrastructure, or insulate our buildings, or rebuild our railroads, bridges, and roads to reduce costs later, or fund the research that drives innovation and productivity. This would increase employment (at no social cost, since the resources being used were being wasted). Putting people to work both reduces fear and, more importantly, actually gives them the money they need to recreate the missing demand.
We should just follow Alexander Hamilton’s model. He wanted an infrastructure bank; we need a housing bank. Let the federal government set up a competent bank, staffed at civil service salaries, to make simple, plain vanilla thirty-year mortgage loans with proper paper filings to qualified citizens buying homes and apartments. The prices should be no higher than ten times annual rental value, replacement cost, or three time the owner’s income. No bonuses, no lobbying or campaign contributions to buy permission to move into higher profit areas, no speculation, no funny business, no trading, and especially no innovation. Sound banking has been boring since the Medicis.