Could the Fed could order banks to just wipe the slate clean. It’s not like the bank loan out my money, in that case you can’t wipe the slate clean.
That’s ultimately what happened. Those who could not pay their debt went bankrupt and the loans were lost. It was a loss on the bank’s book. The banks which no longer had enough liquidity to pay their own debt went bankrupt (or were bailed out). Those who can still pay back their loans do so; why would a bank be interested in “wiping the slate clean”? Would you forgive someone $1,000 if you lent it to them and they were unable to pay it back immediately? Especially if those $1,000 are not really yours, they’re your friend’s who asked you to keep it for safekeeping and to organize his transactions for him.
The term Toxic assets to me seems a misnomer, these assets have a return and give the owner money (instead of choking them like hydrogen peroxide which the name would suggest). The problem is the debt they undertook to buy these assets. and that the government definitely could pay for (erase.)
The fed could print up all the losses, give it to the banks and the banks pay off their debts.
The people who would be hurt is people on fixed incomes, and people who hold dollars (or have some sort of contract denominated in dollars.) As prices rise you can buy less with your savings and fixed income.
This strategy however would completely undermine the capitalist system of profit and loss. Effectively the government would be saying, take a punt if heads you win, if tails they lose (they being mentioned in the former paragraph.) This sort of system would completely suck capital out of producing firms hands and waste it in useless derivatives like CDO’s and Debt obligations.
It also would increase the money supply which is inflationary, and create another bubble in useless derivatives that eventually would grow until the government ends its policy of feeding banks profits by means of inflation.
That to me seems the best answer to your question, however your question seems to ask if the fed could force the banks to forget about collecting their money on loans. This is pretty obvious, it could (ignoring the constitutional limits et al.) And banks could all have 100% delinquency on their loans so they all go instant bankrupt. Or the fed can come in buy ALL the loans and then not collect returns on it (a bit far-fetched.) People with debts would benefit, people who lend would benefit as they’d be selling their loans to the fed at a huge premium. Dollar holders would get annihilated, the exchange rate will plummet, Treasury yields will explode to the moon as inflation wipes out the purchasing power of anything dollar denominated.
We are working with big numbers here, the mortgage market is HUGE. for an idea of the costs of such an idea go to wlmlab.com/main.asp
Now that you mention it, an asset is always positive by definition.