There was a very good article about the US economy in general–and mortgages in particular–in the Times this morning. No, not the New York Times or the Los Angeles Times. It was in the original Times, which was first published in 1785 in London, England. Maybe you need to view things from across the Atlantic to get some perspective on our current financial plight.

Anyway, I urge you to read the piece. It’s all about the Fed’s latest policy of ‘quantitative easing’. Never heard of it? Me neither, up until very recently. But bankers do tend to use dry language, even to describe their most radical initiatives.

And quantitative easing is sure radical. It is the printing of vast amounts of money to buy up long-term debt-mortgage securities and government bonds. And if there’s a grain of truth in Milton Friedman’s monetarist theories, that can only mean inflation.

Perhaps we could use a dose of inflation to kick-start the mortgage and real estate markets. Maybe the alternative, stagflation, is even worse. The Times isn’t so sure. It says:

Quantitative easing is, in essence, what you do as a central bank when you have run out of things to do to avert catastrophe. It is that moment in the horror movie when you are backed up into the kitchen by the intruder and you start pulling out the kitchen sink as your last weapon.

Talk about poetic justice — one of the primary culprits in the derailing of the mortgage industry was the packaging and marketing of mortgage loans as mortgage-backed securities. These were classified as safe by many investment ratings firms but as it turned out few investors had any idea of what they were really buying — until their investments went belly up. This confusion allowed lenders to make increasingly risky and imprudent loans as long as they could be sold. And now Lewis Ranieri, credited by many for the creation of mortgage-backed securities, is himself in hot water over these investments. His own company, Franklin Bank, is in serious trouble, with tumbling asset values, non-performing loans, and disclosure and audit issues that prompted an SEC inquiry and forced at least one senior manager into early retirement.

If the guy who created the system can’t deal with it you know it’s time for a do-over. The problem with the current system is that the originators of mortgages have been able to offload a large part of their risk onto unsuspecting investors, in some cases by bundling less desirable riskier loans together with solid projects and selling the whole thing as a safe investment. Well, now investors are skittish (fool me once….) and sometimes even loans once considered “no-brainers” are impossible to get done these days. For example, a borrower moved into town with a nice chunk of cash and found the perfect home. He offered to put 50% down but needed a no-doc loan because he hadn’t found a job yet. The guy has perfect credit and enough money in the bank to keep going for two years even without a job. No lender will touch this deal. However if this guy had a job, a credit score as low as 580, and only 5% down he could probably get an FHA mortgage. That’s because the risk isn’t born by the lender, it’s born by….drum roll please…US! Taxpayers and insurers will bear the brunt of the fallout if this loan goes bad, so lenders are more than willing to make this loan. Yet I know if it was my own money which loan I’d feel safer doing…