Our policymakers should be open to all kinds of suggestions, like the ones you raise. Whether the Fed already has sufficient powers to combat the bailout is an important question. The Fed has been pumping more and more money into the banking system in order to keep the Federal funds rate low, and has allowed financial institutions to borrow against a wider and wider range of collateral. To date, though, it has been insufficient to calm the panic that has locked up the credit markets.

I think – and this is just my guess – that Paulson and Bernanke decided that actually buying the troubled assets, rather than just lending against them, would provide a more definitive solution and thereby instill the confidence that was previously lacking.

One that I have is why interbank lending is so important when the Federal Reserve is supposedly the “lender of last resort”. In the current crisis, why cannot the Fed increase liquidity in the financial markets and quench the credit thirst? Certainly this would lead to inflation, but I submit this consequence would be less severe than the current bailout plan. The Fed could lend money to those banks and thrifts that establish they are not unduly exposed to sub-prime mortgages (e.g. those who have made good fiscal decisions).

Or how about temporarily reducing the reserve rate to prevent banks from going into regulatory insolvency? Then gradually increasing the statutory reserve rate over time.

Although I am a lay person when it comes to these matters, I find myself proposing rather simple solutions as I learn more about the industry. Why is the most accepted solution so complex? I find it very hard to believe that simplifying the system would not fix the problem. I fear that too many people have become indoctrinated into a complex system that does not need to be so complex (economists, bankers, and politicians alike).

Am I way off the mark? How?

P.S. I noticed a grammatical error in your Baseline Scenario, on page 5 third to last paragraph, last line, “Many others are POURING over…” should be PORING.

I do agree that there needs to be a solution for homeowners that restructures mortgages in a way that benefits both homeowners and lenders, or at the very least cushions the impact of foreclosures, for example by requiring rental periods to minimize short-term dislocation and slow down housing price declines. The language in the final plan on this score was pretty vague. This is one reason why the government’s work will not be done, even if the plan does pass this week.

How about a plan that re-structures Mortgages for primary residences only, forces banks to restructure the mortgages, make those people that bought more house than they can afford rent out a room, or sell part of their house back in a reverse mortgage, or other mechanisms. I think we need some regulation.

If nothing else, Bush has put more power into fewer peoples hands throughout his time in office, and it has always been bad. His push to put 700B in Paulson’s control is just another way to de-democratize our government, take away the checks-and-balances that our constitution designed in, and create a class of royalty in the US.