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About this Wall Street bailout...

So as I understand it, the basic problem is that banks and related institutions aren't willing to lend money even to one another, much less to ordinary customers with good credit, not to mention ordinary customers with questionable credit, because they're not sure they have enough cash to cover themselves if more loans go bad. And the fact that nobody else will lend money to Customer X makes Customer X look like a bad credit risk to the next bank.

So isn't the obvious answer "Lend the banks money"? Not "buy their bad loans," not "buy stock in them," not "increase the FDIC guarantee level," but simply put a bunch more cash into the banking system, with reasonably low interest rates and repayment terms ranging from a few months to a few years. This also has the effect of expressing the government's confidence in whichever banks it lends money to, which should shore up the rest of the world's confidence in those banks. And since it's a loan, it should be fairly low-risk for the taxpayer. It doesn't "buy the investment bankers off the hook," only give them more time to straighten up their acts in an orderly fashion, so it's more politically palatable than buying their maybe-bad debt; the bad debts are still the banks' problem, but they (and their creditors) don't have to worry about going belly-up right now.

Of course, I think that's what the Federal Reserve normally does in tight-credit situations and economic downturns, and they've already done it a few weeks ago. Is there a reason that simply doing the same thing on a larger scale wouldn't solve the problem?


BTW, I read after making the above post that the Federal Reserve did do this on Monday, to the tune of $630 billion (almost the size of the failed bailout package). It got no media attention because everybody was talking about the vote in the House and the stock market crash. Some bloggers say it had no effect whatsoever, presumably because the stock market still crashed that day. I'm not convinced: I think the stock market reacted to the disappointing vote, not to the continued lack of a $700b bailout, and that if no House vote had even been scheduled that day, the Fed action would have been the big news story, and the stock market would have jumped up rather than down. At any rate, any real effect of the Fed action wouldn't be visible on the day it was announced; I'm guessing that this action will help significantly in the next few weeks.
Thank you for this and the other post/journal about the bailout.
Your solid reason deflates a lot of bickering.

I just read about the Fed lending money last night and have not had time to verify; but it looks like a better solution anyway.