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Lend to people who want to buy houses so we can build more. Buildings creates lots of jobs.
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Over production hurts existing homeowners as well as the banks who are just starting to bring foreclosures to the market. In fact, foreclosures are still going up and more ARM's are going to reset this year. The only reasons the RE market isn't worse is because of the tax credit and that the Fed has been buying mortgage backed securities, keeping interest rates low.
The government is trying to preserve the status quo, but doesn't have any idea of how to move forward. For banks to lend freely, borrowers will have to be credit-worthy once again, and that involves creating real jobs and restoring our national economy.