Here's a way to reduce the size of your balance sheet: write down assets. According Bloomberg, that is what the Fed plans to do under the "Homeownership Preservation Policy": “The goal of this policy is to avoid preventable foreclosures on such assets through sustainable loan modifications and other actions that are consistent with the Federal Reserve’s obligation to maximize the net present value of the assets for the benefit of taxpayers,” according to the document.
The Fed’s “Homeownership Preservation Policy” lets the central bank or its agents “promptly” review applicable mortgages to determine whether the borrowers should be offered a loan modification, the document said. Qualified borrowers must be at least 60 days late on their payments. And the itemized bailout continues. The Fed bails out AIG and Bear Stearns (and Citigroup), but leaves Lehman Brothers and Washington Mutual to fail. By extension, delinquent mortgage holders related to assets acquired through the bailout of AIG and Bear Stearns THAT ARE 60 DAYS LATE will be offered a loan modification.
I find it very hard to believe that (1) the Fed can get this program running smoothly in a timely fashion, and (2) the $74 billion of assets that may or may not be tied to 60-day delinquent mortgages will make a darn bit of difference.
The Fed should continue with its MBS purchase program, and leave loan modifications alone. The Fed acquired just $5.8 billion of MBS on its balance sheet since January 5, when the program got underway, or just 1% of the $500 billion allocated two months ago.
It occurs to me that the Fed may be going down the following path: it puts in half an effort into each program before dropping it for another "cooler and more effective" program. Fortunately, the money supply is still growing - the main reason that the Conference Board's leading indicator rose in December - but unfortunately, I am becoming increasingly skeptical of the Fed's ability to stay on its chosen path. And that is bad for credibility.