Economic recovery is “frustratingly slow and halting,” and the “massive destruction of wealth” the crisis caused by pushing down home and stock prices, the tightening of credit, and uncertainty about the European situation all contributed to the slow recovery, Williams told the Central Bank of Chile, according to prepared text released by the Fed.

But the drop in home prices “also wiped out the home equity of millions of mortgage borrowers,” in some cases making them owe more than their homes are worth, unable to borrow or refinance, and in worst cases at the point of delinquency and foreclosure, he said.

Small businesses often use their equity in their homes to get loans, but they can't do that now, creating “a broad-based credit crunch that is restraining both consumer and business spending,” he said.

“In this environment, monetary policy alone would take a very long time to bring about the desired outcome of maximum employment,” Williams said.

“Fiscal policy actions that reduce uncertainty and stimulate recovery are badly needed,” he said. “What would be especially helpful at this juncture are fiscal policy actions that work in tandem with monetary policy to stimulate the economy.”

“One example of such a policy is the recently announced U.S. government initiative to make it easier for underwater homeowners to take advantage of very low rates and refinance their mortgages,” he said. “This will trim monthly payments for some households and could reduce foreclosure rates. And it could also eventually provide a modest boost to consumer spending. Other actions that address the continuing problems in the housing market could help spur recovery and enhance the effectiveness of monetary policy as well.”