No Time To Sit and Watch

Unfortunately, Poole is not the only policymaker who can't seem to get past ideology and outdated economic nostrums.

Although the problem in credit markets has spread well beyond the housing finance market, the inability to sell or borrow against anything associated with mortgages is causing the biggest problems. And yet the Bush administration still stubbornly refuses to allow Fannie Mae and Freddie Mac the latitude to fulfill their core mission and provide liquidity to these markets when private lenders and investors retreat.

With the stroke of a pen, James B. Lockhart, director of the inelegantly named Office of Federal Housing Enterprise Oversight, could free Fan and Fred to borrow more money and buy up more mortgages at a time when rising rates for even prime borrowers are putting extra burdens on a housing market already struggling with excess inventory, declining sales and falling prices.

Instead, Locky thinks it's much more important for Fan and Fred to finish cleaning up their books and continue doing penance for their questionable accounting. After all, why deal with a real-life threat to the safety and soundness of the global financial system when you can focus on the theoretical safety and soundness problem that might arise if Fan and Fred were allowed to temporarily grow their balance sheets.

It is true, as Locky noted in his letter to Fan and Fred, that their legislative charter prevents them from participating in several segments of the mortgage market that are experiencing problems, particularly the market for "jumbo" loans over $417,000. But given the severity of the mortgage meltdown and its knock-on effects throughout the credit markets, it is fair to ask why the Bush administration hasn't worked a deal with congressional leaders to put a pending Fannie-Freddie reform bill first on the agenda when Congress returns after Labor Day. Such an announcement would probably go a long way to calming housing finance markets.

What is not helpful is for the White House and the Treasury to keep repeating the silly line that there's nothing to worry about because the "economic fundamentals" are so strong.

A quick check reveals that, back in 1989, when the S&L crisis was unfolding, the U.S. economy was growing at a healthy 3.5 percent, with unemployment at a comfortable 5.3 percent. In 2000, as the tech and telecom bust was getting underway, annual economic growth was running at 3.7 percent and the jobless rate was at a post-war low of 4 percent.

In both cases, it quickly became apparent that the good "fundamentals" weren't really so fundamental, owing much to an asset bubble that was bound to burst. And in each case, the economy deteriorated so quickly that it caught the Fed and other policymakers flat-footed.

There's no need to make the same mistake again. Now is the moment for the Fed, in concert with other central banks, to use its powers to restore order to financial markets.

That could mean strategically selling dollars and buying yen, for example, to offset the sudden impact of the unwinding of the carry trade.

It could mean lowering the Fed's discount rate, which it charges banks for overnight loans, and opening the discount windows to a wider group of financial institutions.

And it certainly wouldn't hurt if the Fed and the European Central Bank would announce together that, in the face of changing circumstances, they are as worried about too little economic growth as too much inflation.

That seemingly minor tweak to their most recent policy statements would go a long way to calming markets by suggesting that a broader rate cut could be in the offing. More importantly, it would reassure uneasy businesses and consumers that economic policymakers are not so intent on "punishing" investors and lenders for their bad bets that they are willing to force billions of innocent bystanders to suffer as well.

Steven Pearlstein can be reached atpearlsteins@washpost.com.