WASHINGTON — What’s left in Uncle Sam’s economic tool kit? The commitment of $700 billion didn’t impress markets here and around the world. Neither did fresh interest-rate cuts. Stocks plunged again Thursday.
The government still has some unused options — like buying up foreclosed properties and making direct loans to homeowners — that might ease the credit and housing crises and brighten the economic outlook.
But the options are dwindling and generally involve partly taking over private companies, an idea that’s anathema to economic conservatives and others in America.
Even as policymakers counsel patience in waiting for the prescribed medicine to fully kick in, they are searching hard for other approaches.
“So long as financial conditions warrant, we will continue to look for ways to reduce funding pressures in key markets,” Federal Reserve Chairman Ben Bernanke says.
The Fed’s primary tools are lowering interest rates and flooding the system with money. It’s already done plenty of both.
It could further lower interest rates — and probably will if the downturn continues. But after this week’s half- percentage-point cut, coordinated with other nations’ central banks, there isn’t a whole lot lower for the U.S. to go.
Since September 2007, the Federal Reserve has pushed its benchmark short-term rate down to 1.5 percent from 5.25 percent.
The Fed presided over by Alan Greenspan kept interest rates at 1 percent for a full year earlier in the decade — and many economists suggest that was one of the root causes of the housing bubble, making it too easy for people to take out loans they couldn’t afford.
And besides, in Japan holding rates near zero for years did little to help a deeply troubled economy.
The Fed could inject more money. But it has already flooded the financial system with hundreds of billions of dollars.
And bold action by the central bank can have unintended consequences, signaling to investors that things may be worse than they thought, contributing to the downward spiral in markets.
Apart from the Fed, Congress last week enacted a bailout package backed by up to $700 billion in taxpayer money, on top of a $300 billion housing package passed in the summer. Treasury Secretary Henry Paulson says it will be weeks before the government actually starts using the bailout money to buy soured mortgage- based securities.
Former White House economist Glenn Hubbard proposes that the government refinance every U.S. mortgage held by Fannie Mae and Freddie Mac into 30-year loans fixed at 5.25 percent. He also suggests that putting in place a cleanup agency modeled on the Resolution Trust Corporation, set up to take over more than 1,000 failed savings and loans in the late 1980s and early 1990s could help.
Economist Rob Shapiro of NDN, a think tank formerly known as the New Democratic Network, said that so far the Fed is “putting as many fingers as it can in the dike” without stemming the flood.
He said the government should consider issuing direct loans to home owners facing foreclosure.
Republican presidential candidate John McCain has proposed a $300 billion program to take over their mortgages and renegotiating the terms — a step authorized by the $700 billion package signed last Friday by President Bush.
Critics complain that many of the mortgages involved have been repackaged into complex investments that are now nearly impossible to value.
