Fed: Trying to cure the subprime market, not kill it
All well and good, I suppose. But how do you do that? The problem right now is that the securitization system has incentivized lenders to deliver volume, not quality, in terms of mortgage production. When many of the top quality borrowers were exhausted back in 2005 and 2006, lenders had every incentive to keep churning out worse and worse loans because there were end buyers for the paper out there. It effectively didn't matter to the loan originator whether those loans eventually failed or not. Whatever system we adopt to "fix" this mess should somehow link the originating entity to the loan's ultimate resolution.
Of course, it's worth pointing out the only reason the Fed is being forced to deal with this mess is because it refused to nip it in the bud. It all goes back to the ridiculous, "see no asset bubble, hear no asset bubble, prick no asset bubble" policy I blogged about a few days ago.