But there's another strategy that's by far the cheapest and most immediate way to deal with the problem: The Federal Reserve needs to cut the federal-funds rate, the short-term rate that it lowered last week to 3.5 percent, in half, to 1.75 percent, and it needs to do it now. That would be a huge shock treatment that would send mortgage rates plunging and allow home buyers from the 2005-2007 vintage, where the real problems are, to escape the death spiral of adjustable mortgage resets (those rates are pegged to the federal-funds rate). For those who have put down little or no equity and are hanging on, the Federal Housing Administration also needs to guarantee a refinanced mortgage at a much lower rate, which it will be able to do without much risk if the federal-funds rate is cut that low. The FHA is already set up to make just this kind of guarantee (and funded to absorb potential losses). Meanwhile, a huge number of people with good incomes and equity in their homes will be able to refinance their existing mortgages, which would put far more spending money in people's pockets than a onetime $1,200 check. In fact, in many cases it could produce that kind of savings every month.
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