1) In a credit squeeze, it would be politically convenient to point out that the Fed's discount window is available as a lender of last resort.  This calamity is not due  to  the lack of money at the  banks, it is due to a chaotic financial miasma that has arisen due to an archaic accounting system. Banks can not close the books for the fiscal year since they do not know what the valuation  of their MBS and derivatives are.

2) It is  important to increase the limits of FDIC coverage for deposit accounts to reflect the current reality.  Most people do  not  have deposits over the limit, but those who do would be encouraged to  move their money from "papers" with no legs to real monetary deposits, at whatever interest rate. If the banks have deposits on their  books, they can presumably resume their normal lending.

3) Reducing the reserve requirement for banks may provide an immediate boost to the credit market.  In theory, this  may pose a danger, since this measure is meant to provide solvency to counter a "run" on the banks, but is it really necessary, given the FDIC backup, and the  new  flexibility in bank mergers?   As a measure of last resort, we could limit cash  withdrawals to $100.- a day per account, both at the ATM's and at the teller windows.

4) We can flat line both the real and the virtual mortgages at their origination date, by rewinding the computer tapes as it were and rebuilding the balance sheets based on an accounting concordat that is legally binding.  Banks can close out with a valid result, because both the MBS underlying nominals and the real mortgages are symmetrical.  See the article at vantari.com/economic.  Insurance could be issued to cover mortgage payments at this valuation level until the MBS expires,  because the actuarial formula can be computed using the fixed property valuation that has been agreed to, by law.

The "balloon" resulting from a drop in assessed valuation is a homeowner liability that is  due when he sells the property, not before, giving us time to work them off when valuations once again increase, or to roll them over as legally registered liens, for the new owners to dispose of.   This speculative "balloon" becomes a  deferred payment that can be  passed along to the MBS trunches for each mortgage that is in trouble since the total indebtedness does change at that level. The assessed valuation  of the underlying real estate in the MBS trunches and of the real estate mortgagees themselves would remain as it was at loan origination, for those loans which were underwritten during the period of speculation.

Atlanta, GA
Sep 30, 2008