Fed on the money

People defaulting on mortgages is an effect, not a cause. The major economic problem (other than sheer panic) is that banks are sitting on their hands, refusing to lend money. The bailout bill is a triumph of trickle-down theory: the premise is that if we give the banks enough money, they’ll feel comfortable lending money again. After all, isn’t that what banks do with money? 20 years ago that would be good reasoning, but today banks use their money to speculate in unregulated markets with no leverage controls. Giving the banks more money is just giving a fresh stake to someone with a gambling addiction living in a suite in Vegas and hoping that they’ll go pay their rent back in Poughkeepsie like they used to.

So the bailout bill didn’t actually reassure the stock market. The Fed announced plans today to enter the commercial paper market, meaning we the people will start doing direct short-term lending to large businesses. With Fannie and Freddie nationalized, we are already lending to homeowners. If 10% of the bailout bill had been steered to the SBA, we could have quadrupled our lending to small businesses. Keep the change—be the liquidity you wish to see in the world.