Last Tuesday, the Federal Reserve downgraded the economic recovery as GDP growth was slowing faster than anticipated and job growth had yet to materialize. Additionally, the Fed announced back in August that it was going to take $250 billion in expiring securities from its $2 trillion balance sheet and invest them back in Treasury bonds.
The Fed also added that it is prepared to intervene once again in the event that economic conditions deteriorate. One CNBC analyst equated the statement to the Fed opening the door for a 2nd round of Quantitative Easing 2, placing one foot through the door, but not walking entirely through. The Fed's next meeting starts on Election Day with the statement being released the day after.
If the Federal Reserve comes back in, they could print up to an additional $2 trillion and use that money to buy Treasury bonds (in an effort to lower interest rates). I believe that the Fed would be wasting its time as low interest rates can only do so much to boost the economy. We could set interest rates to 0% and it would do very little to boost the credit and housing markets. Even if it did, the likely result would be a similar bubble that brought us here in the first place.
The Federal Reserve ought to look at measures to encourage and accelerate de-leveraging of debt throughout the economy. Think-tanks and private institution experts (FASB, for example) should be brought in to develop creative strategies to reduce corporate debt and bank liability from such a reduction. Maybe new types of bankruptcy need to be developed?
Either way, we need to think more creatively about this crisis if we are going to develop a good solution. Carpet bombing the economy with "free money" has been largely ineffective, so it is time to turn to something else.