Ezra Klein at the Washington Post offers a way out of the current mess:
Tomorrow morning, Bernanke could walk in front of a camera and announce that the Federal Reserve intends to begin buying huge numbers of mortgage-backed securities with the simple intention of bringing the interest rate on a 30-year mortgage down to about 2.5 percent and holding it there for one year, and one year only.
The message would be clear: If you have any intention of ever buying a house, the next 12 months is the time to do it. This is Uncle Ben’s Crazy Housing Sale, and you’d be crazy to miss it.
Now, financial markets are not my specialty, and maybe Klein has thought about this more deeply than I have, but there seems to be a little flaw in this plan.
Namely: If the interest rate is currently 2.5 percent, and everyone believes it’s scheduled to go up in a year, where is the lender who willingly locks himself into a 2.5 percent rate for the next 30 years?
I think maybe Klein forgot that the lending market needs lenders, not just borrowers. Back in the old days, we used to call it “supply and demand”.
Edited to add: As Mike H, Morten, Daniel Hewitt and others have pointed out, the Fed itself is the missing lender. I had indeed missed the point.
As Emily Litella used to say: Never mind.