Ian Welsh’s recent article Simple Solutions For America #1: Fixing the Mortgage Market makes strong case for how the Government should handle to mortgage meltdown: instead of accepting these junk mortgages as collateral for loans, as the Fed is now doing, Welsh contends that it would be better for the Fed to actually purchase these mortgages outright, at a “fair market value’ (e.g. the mortgages’ price in 2001, before the bubble), and work with the borrowers to establish a fair, workable repayment plan.

The benefits to this plan:

• Mortgages, which are not essentially worthless, would have value again. This is imoprtant, since the US economy follows the mortgage economy very closely.
• The government would actually make a long-term profit, instead of simply throwing billions of dollars of taxpayers’ money at people who offered and accepted bad loans.
• The people responsible for this mess would lose money, which is a principle of the free market, and would discourage these kinds of shenanigans in the future.

After a cursory glance at this plan, I don’t see any glaring problems. Thoughts?