It is the realm of the Federal Reserve to decide the nation’s interest rates. I see every reason to keep the ‘risk free’ interest rate at a minimum, and let the market decide the subsequent credit spreads as it assesses risk.

Since government securities function to support interest rates, and not to finance expenditure, they are not necessary for the operation of government. Therefore, I would instruct the Treasury to cease to issue securities longer than 90 days. This will serve to lower long term rates and support investment, including housing. Note that the Treasury issuing long term securities and the Fed subsequently buying them, as recently proposed, is functionally identical to the Treasury simply not issuing the securities in the first place. I would also instruct the Federal Reserve to maintain a Japan like 0% fed funds rate. This is not inflationary nor does it cause currency depreciation, as Japan has demonstrated for over 10 years. Remember, for every $ borrowed in the banking system, there is a $ saved. Therefore, changing rates shifts income from one group to another. The net income effect is zero. Additionally, the non government sector is a net holder of government securities, which means there are that many more $ saved than borrowed. Therefore lower interest rates mean lower interest income for the non government sector. It is only if the propensity to consume of borrowers is substantially higher than that of savers that the effect of lower interest rates be expansionary in an undesirable way. History has shown this never to be the case.

Lower long term rates support investment, which encourages productivity and growth. High risk free interest rates support those living off of interest payments (rentiers) thereby reducing the size of the labor force and consequently reducing real national output.

I would also recommend that the Treasury explicitly guarantee the debt of the FHLB and FNMA. This will serve to reduce their funding costs which will entirely be passed through to qualifying home buyers. There is no reason to give investors today’s excess funding costs due to the uncertainty over today’s indirect guarantees, when in all likelihood the government would support its housing agencies in the national interest. Furthermore, an explicit guarantee eliminates the risk of a liquidity crisis, thereby reducing the risk of an actual loss.