The government's latest plan (as of today, November 26, 2008) has the Fed buying mortgage-backed securities from Fannie, Freddie and the gang. I'm OK with the program in general, but here's a bit of hubris I cannot tolerate: the claim that it will help the housing market.
Housing consists of owner-occupied (or increasingly owner-unoccupied) plus rental housing. The proportions are roughly two-thirds owned, one-third rented. Bringing down mortgage interest rates will help one sector of the market, but only at the expense of the other. As I showed with charts in this post from a couple of weeks ago, we have an excess supply of both types of housing. There is no solution to the excess supply of housing other than to have a good-sized fire, or grow our population. The latter solution works, and works well, but at a slow pace. We grow our population by about one percent per year, so we'll eventually grow to fit our housing stock.
Here's what I like about the plan: it silences critics of the Fed who say that they don't have much room to ease monetary policy. Sure, the Fed Funds rate is less than one percent, so the usual interest rate that the Fed influences cannot be moved much further. But the Fed can conduct monetary policy in any number of instruments, including mortgages. (Many years ago, the Swiss wanted to conduct open market operations but there were no Swiss treasury bonds outstanding, because the country had been running a balanced budget. So their central bank conducted monetary policy buying and selling mortgages rather than treasuries. No problem.)