So, really, interest on reserves, the QEs, etc. can all be thought of as ways to maintain deposit levels at the banks while the banks accumulate treasuries and agency securities.
This might be all well and good in a crisis (notwithstanding the question of whether the crisis could have been averted in the first place). But, the natural market demand for mortgage debt will be high as long as our geographical centers of economic opportunity are governed by limited housing. Since we blamed credit itself for the problem of high home prices, we developed a national policy framework of smashing down the level of mortgages outstanding. But, we never actually tackled the real source of the problem, which is the Closed Access cities.
So, since 2008, regulatory pressures and federal control of the GSEs have been the main tools for suppressing mortgage growth. So, we have basically diverted 10% of bank assets out of residential investment and into treasuries. (Did I hear somewhere there was a problem with a savings glut and low interest rates?)
One other item that I think is of interest here is that real estate lending began to drop at the banks by early 2007. When the private securitization market collapsed in summer 2007, real estate lending also stopped growing at banks.
The drop in mortgages didn't happen because there was a lack of money. It happened because there was a lack of faith in home equity. The first collapse was in home equity. More than $1 trillion of that collapse happened before 1Q 2007 when home prices were still basically at their peak. This was a shift of existing homeowners out of the market.
It's ironic that every guy at the end of the bar knows that what happened is that all those silly, greedy speculators thought that home prices could never fall, and that they kept pushing prices up when the drop was inevitable. On the contrary, for more than a year before prices collapsed, home owners were fleeing the market in anticipation of a price collapse. When the collapse in mortgages finally happened, it wasn't because mortgage originators ran out of suckers. It was because rating agencies, lenders, and qualified home buyers all became convinced that housing was doomed to collapse. The Fed's response was, "Yeah. Probably right. We'll be letting that happen." And the collapse was the last thing to happen.
So, originations from both the banks and from private securitizations were drying up by early 2007, because nobody was willing to be a lender or a borrower with those expectations. When private MBS securities collapsed later in the year, it was because of expected future defaults that were presumed to be inevitable because of those expectations. The Fed confirmed that they would enforce, or at least allow, those expectations to come to fruition. Because we all just knew that supporting anything short of a complete collapse would be irresponsible. We have come to conceive of systematic instability as a public good.
Notice that graph of GDP and residential investment. They collapsed together by mid 2006, even though mortgage growth was still healthy. The first collapse was a real collapse - an unnecessary real collapse. And the real collapse is what eventually led to the nominal collapse.
I happen to think that the market monetarists are on to something, and that nominal instability can create instability in real production. But, in this particular case, the real economy was the first mover. This was still a monetary phenomenon in many respects. Bernanke himself takes "credit" for that drop in residential investment because the Fed had raised rates into mid 2006, which we might call the interest rate channel of monetary policy. Then, the Fed clearly signaled in 2007 and 2008 that they were willing to watch the bottom drop out of housing. That is what we might call the expectations channel. And even after the disaster of September 2008 when the Fed finally committed to stability - still over the objections of many flavors of liquidationists - most of the collapse in the low end of the housing market was imposed through punitive and erroneous regulatory policies.
But, all that being said, much of the damage might have been avoided with a simple NGDP growth peg. If the Fed had had an NGDP growth target, they would have had to support the nominal economy despite themselves. It's possible, I think, that the effect this would have had on expectations might have been enough to prevent the collapse in home price expectations that had caused the initial collapse in home equity to begin with.