Smart guys on Wall Street are telling me the central bank ought to expand its collateral regulations so that open-market purchases can channel new cash into non-government-backed mortgage pools, jumbo mortgage loans and asset-based commercial paper. This would channel the flow of new credit to specific areas that need help. Unfortunately, even money-good paper is being tarnished by the relatively low percentage of money-bad sub-prime paper.
Credit markets really need a short-term liquidity rescue operation. This would allow well-managed lending institutions to survive the credit squeeze without going under. There's about $2.2 trillion dollars of asset-backed commercial paper that has to be rolled over as financial institutions de-leverage their positions. If the Fed started buying, healthy banks would follow suit and relieve the trading freeze.
Meanwhile, the Treasury Department might let Fannie Mae and Freddie Mac expand their mortgage loan purchases and balance sheets under certain conditions to be clearly spelled out in congressional legislation. Rep. Barney Frank's House Financial Services Committee has a decent bill to raise GSE loan limits. But the Senate must take it up soon if it's to have an impact. Conceivably, Fannie and Fred could even buy sub-prime mortgages. At the margin, this would help.
Speaking on deep background, one Treasury official told me that while the department is constantly in touch with federal bank regulators, private sector banks and mortgage lenders, 80 percent of the liquidity-enhancing tools are at the Fed.
What we've got here is a profitable business sector that is generating ample incomes, jobs and consumer spending despite the low-income housing-loan problem. Remember, less than 1 percent of total mortgages are in sub-prime foreclosure. And the global economic boom, as represented by surging U.S. exports, provides yet another cushion to the overall economic story.
While the credit power outage is a big problem, the Fed and Congress could provide the key solutions. But the economy is not dead. Not by a long shot.