If rate cuts will not work, what will? Would nationalizing the mortgage sector do the trick?
With worsening strains in credit market threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses -– perhaps buying mortgage-backed securities directly.
“As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan Chase. He said two options are garnering particular attention on Wall Street: Direct Fed lending to financial institutions other than banks and direct Fed purchases of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed by the two shareholder-owned, government-sponsored mortgage companies.
Fed officials have said that, at times like these, the prudent course is to at least evaluate all sorts of ideas, many of which may be rejected. Since 1932, the Fed has had the authority to lend, against collateral, to individuals, partnerships or corporations other than banks in “unusual and exigent circumstances,” subject to the vote of five members of the Board of Governors. (The board has seven seats, but two are currently vacant.) This power has never been used.
But, Mr. Feroli noted, that Congress in 1966 gave the Fed temporary authority, made permanent in 1979, to purchase obligations of government-sponsored enterprises, such as Fannie Mae and Freddie Mac. So far, the Fed hasn’t purchased GSE obligations except in its short-term repurchase operations. When the federal budget was in surplus, the Fed considered outright purchases of GSE obligations, but judged against such a move as it would reinforce the perception of an implicit government guarantee.
Well, it would not be the first time, but it won't help much. The RTC, which nationalized the Savings and Loans, did such a great job liquidating those positions it held down real estate from 1989-1995.
ReplyDeleteAmazing, isn't it, that all of the government's meddling in the mortgage and credit markets still passes for sensible activity?
The real problem is - what do you do with lots of people who cannot pay? Creditors are going to have to take losses. The next wave of those losses might be less severe, since they are less likely to come from the banks, but at the same time, they are more likely to be hedge funds and insurance firms with large derivative positions, which may add to massive counterparty risk in the structured finance markets.