In a move that we have been talking about on our weekly radio shows for the past month, the federal government/Fed announced that it will ‘lend’ up to $7.4 Trillion to keep the financial system afloat. However, anyone who has been keeping track of the Fed’s lending to banks and other financial institutions over the past 6-8 weeks has noticed that this action has already begun as Fed loans have averaged over 1/2 trillion per week during that period.
As has been the case with much of the ongoing crisis, the modus operandi appears to be 1) Do it; 2) Announce that you’ll be doing it in the future, then in fact do much more; 3) Repeat process as necessary.
It is the last part that is the most unsettling. With the ice broken, there is no upper limit to what the Fed and government will give away to protect the financial system. While the current assertions are that taxpayers are ‘investing’ in these bankrupt firms and that the ‘losses are highly unlikely’, these assertions are fairy tales rooted in flawed logic. For whatever reason, the financial authorities are choosing to assume that the reason these troubled assets are troubled is because the market is wrong and not because the assets are worthless.
It is exactly these types of flawed assumptions that have and will continue to lead to ineffectual and misguided policy decisions resulting in a further decay of the American economy.