The US economy is in the midst of a very slow recovery. Moreover, government does not have much ammunition left to deal with the problem. Fiscal policy is off the table because the GOP will block any plan to improve the economy prior to the 2012 elections. The Fed has lowered short term interest rates to the zero bound and it has used quantitative easing to lower 10 year treasuries to around 2% which is approaching the limit lower bound for longer term debt. This proposal (via Paul Krugman) is for the Fed to purchase mortgage backed securities in order to drive mortgage interest rates down even further. It will stimulate refinancing and help to prevent foreclosures, and it will stimulate the housing market. The plan is presumed to raise GDP by 2% in two years and it will increase employment by 4 million.
The mechanisms by which the proposed plan will work to stimulate the economy and promote job growth are outlined in the proposal. It may be ambitious but it does get to the heart of our economic malaise. We need to rebuild household balance sheets and perhaps restore some the lost wealth from the decline in home prices.
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