The Fed and Treasury are getting closer to the only viable solution: support of the housing market via purchase of GSE housing securities.
Now its up to Congress to create some tax holidays on the fiscal side and we will come as close as possible to "fixing" what is capable of mending.
The Fed is already targeting mortgage rates. The central bank believes it can buy Fannie and Freddie securities without any credit risk because the government now stands behind them. Senior Fed officials are enthused by the impact of their announcement about buying Fannie and Freddie paper and see scope for more large-scale intervention.
The central bank has a limitless capacity to buy Fannie and Freddie securities, providing it is willing to expand the money supply – something that helps guard against deflation. Alternatively it could issue debt to fund purchases, although this would require approval from Congress.
The Fed effort and any new Treasury efforts to hammer down loan rates could operate in parallel. But the two initiatives might come together, with the Fed buying the 4.5 per cent loan securities.
Interest is also growing in a much more ambitious version of the low-cost loan plan that would involve offering 4.5 per cent loans to refinance existing mortgages as well.
This would have some extra effect on house prices but its main importance would be as a macroeconomic stimulus: a de facto tax cut for homeowners.