The Fed: "Don't Make Me Do It!"
The idea is basically that creditors would be well advised to work out their problems with debtors, rather than respect the terms of the contract signed by both parties. Apparently, the notion of a contract is no more sacred to the Fed than that of private property is to the Supreme Court.
[Thanks to ejmas.com for the image.]
I get their point; but it would be nice if the Fed didn't try to twist arms, and instead just came clean about their part in this drama. They hand out cash; and then they wonder why the price of a home triples in eight years. Is it so difficult to accept the obvious?
Then, surprise, surprise: The housing market bottoms out. Well, that's what bubbles do. They burst.
Solution: Force the creditors to swallow the losses by wiping their derrieres with the contracts. (Can it even be done, at this point? Those contracts have been sold, and are themselves part of a multitude of other contracts. I don't think it's even feasible; but the threat of more government regulation and/or sanctions can sometimes work miracles.)
The nation is ... well, let's say "unsettled." The more high-roller mortgage brokers are already dead. The more prudent are now next in line at the gallows.
The hedge funds are worried that their quants and sure-thing speculations will not self-realize before they get the "Game-Over."
The bankers should be worried, if they're not, that the over-leveraging of their conduit and credit-derivative divisions will wipe out their reserves, and then some. (Too late to get those bonuses back; dang.) They're also worried about more government interference in the banking industry.
Freddie and Fanny are praying that they won't be required to absorb all these failing loans into their already shaky portfolios, which would probably put them over the edge and require a Treasury bail-out (and change a few managers' names, even though it's not their fault).
The FHA, FDIC, PBGC (Pension Benefit Guaranty Corporation), et al. are sweating the potential claim scenario should their services ever actually be needed.
The President is worried that the government-appointed-Fed's mistake will cause innocent taxpayers to vote Democrat next year. (He is also probably hopeful that his Helicopter George idea will save face for his administration's miserable handling of Katrina, which is not even their fault, because they didn't create FEMA in the first place; but that's the nature of politics.)
The legislators are afraid that they won't get reelected if they don't pass some law to bail out the poor bastards who can't afford the house they live in (or don't live in, as the case may be).
The Fed is fearful that admitting their own mistake could cause innocent taxpayers and home buyers to revolt and call for the Fed's demise.
Ah, the domino effect. Thank goodness the job market is still strong (isn't it?), and the Fed won't have to succumb to pressure to lower the target rate, adding insult to injury......