After getting hit by "walk aways", the banks won't touch borrowers with a "ten foot pole" ever again. They will sit on the yield curve, monkey around trading the markets, and ripping-off high debt credit card holders that got trapped in the teaser period era with 12 to 25% rates when 10-year is 2%.
Solution is to get rid of non-recourse loans and make credit card debt VERY hard to discharge in BK in return for a sub 10% rate. Loans would start flowing again.
I really don't think the Fed is gonna sit idly by and let the situation continue to deteriorate, it just hasn't been their style. Maybe an alternative route 'the Beard' chooses to use would be to shift the composition of the balance sheet to agency MBS from Treasuries. Purchasing risky assets would likely trigger the portfolio balance effect. A rally in mortgages should be followed by tighter credit spreads; if bank credit spreads also tightened, the equity market would likely follow that. Thoughts?