Dear Federal Reserve: Buy only MBS's that have been refinanced or loan modified, and provide a Citizen's line of credit

A quote from William Greider on a modest example of what the Fed could do to help revive the housing sector.

[The Federal Reserve]could announce its intention to buy only new mortgage-backed securities that have been subjected to the process of refinancing and modification to establish positive equity and more realistic valuations. The mere announcement would cast a cloud over the existing stock of GSE mortgages and probably trigger a wave of market-driven mortgage adjustments. The Fed, in effect, would not only provide a model for debt write-downs generally but help create the market for them. The Fed’s presence would assure people the process does not threaten the banking system. For distressed homeowners, it would amount to redistribution of income and wealth—sharing the costs of the financial catastrophe among other players instead of dumping all the pain on borrowers. Unilateral action would send a cleansing shock wave through the political system.

Greider relates another interesting idea from Miles Kimball, an economics professor at the University of Michigan: A government created “federal credit card.”

..."send one to every adult in the nation, enabling each person to borrow $2,000 at a very low interest rate (my comment: why not zero interest?) and not pay back any of the money until after the economy has fully recovered (my comment: or ever?) . The provocative kicker in Kimball’s proposal is that the Federal Reserve would itself provide the financing, not Congress or the president through the federal budget. And he argues that the central bank can do this with its unique power to create money. A federal line of credit, Kimball suggests, could become a new, fast-acting channel for economic stimulus—more potent than the usual methods like tax rebates, and far less costly. That’s because consumers would not get any benefit from this government assistance unless they use the card—that is, borrow and spend—and do so before the government’s offer expires. After all, this is exactly what the economy needs. Why give the money in tax breaks for banks or businesses, which may not use it for the intended purpose? Why not deliver the aid to consumers, who will? Kimball argues that this novel approach could deliver a strong, quick jolt to the stagnant economy, $400 billion or more. Yet it would add very little to the federal budget deficit, because the Federal Reserve operates under its own, independent balance sheet. Further, it’s not free money but a temporary loan, like the trillions in short-term loans the Federal Reserve gave the banking system at the height of the crisis. The low-priced credit would immediately help pressed families scrambling to pay the rent, young people without jobs and especially the desperately poor, who are “unbanked” and victimized by predatory lenders charging usurious interest rates for “payday” loans. “A big advantage of national lines of credit,” Kimball explained, “is that, once triggered, the details of spending are worked out through the household decision-making process, which is relatively nimble compared to corporate and government decision-making processes.” The banking industry would go nuts, of course. Its lobbyists would rail against unfair competition (just as many citizens complained about the unfairness of the bank bailouts). But the homely truth about capitalism is that it cannot function without a constant cycle of new borrowing and debt. Despite popular moralistic aphorisms (“neither a borrower nor a lender be”), the capitalist process requires that someone is always lending and someone else is always borrowing. If risk-averse creditors refuse to lend and struggling consumers or businesses are prevented from borrowing, only the federal government has the power to intervene and get the money moving again. If the government does not step up, stagnation endures. A federal credit card sounds far too radical for the conservative central bank. But it actually offers a viable solution to the Fed’s stymied monetary policy. Professor Kimball has already introduced it to Federal Reserve governors themselves, at a private conference for “academic consultants” who advise the central bank. None of the governors commented one way or the other afterward, and it is highly unlikely Kimball’s idea will be tried. It would probably require Congressional blessing, and Congress is hobbled by do-nothing paralysis. Nevertheless, policy advocates and citizens should push Fed governors and politicians to explore the concept seriously. Kimball’s account of his proposal, “Getting the Biggest Bang for the Buck in Fiscal Policy,” can be found at his blog, supplysideliberal.com.