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Banks, Bad and Good

I read What’s Missing in the Stimulus Plan at the NY Times this morning. They interviewed eight economists, of whom six were the kind of Conservatives Paul Krugman warned us about a couple of days ago.

But the obvious cheap shots don’t pose as much danger to the Obama administration’s efforts to get a plan through as arguments and assertions that are equally fraudulent but can seem superficially plausible to those who don’t know their way around economic concepts and numbers.

The Times gave so much space to ideologues who never seem to actually look at the repercussions of the decisions made according to the principles they espouse, you’d never know their editorial board lauded the stimulus package. Maybe they just like ideologues.

I decided that since everyone is building mythology around this, I could put on my rhetorician hat and see if I can come up with a supportable idea to deal with this economic mess.

I’m focusing on a couple of American ideals here…competition, free markets and justice…and trying to address what we all agree is the central problem…the frozen credit market.

The government is pretty much giving away money in the (demonstrably vain) hope that banks would lend the money rather than squirreling it away or handing it out in bonuses. Having given out that money, I would like them to stop doing that. Now. Nor do I think creating a Bad Bank to absorb the losses is a good idea. Instead, I think the Federal Reserve should truly become the lender of last resort by creating a Good Bank.

I think credit-worthy borrowers should be able to borrow from the Fed after demonstrating they have no other option; say, after being turned down by two banks that refuse to make loans (and we know who you are now). This way no one can say the Fed is actually competing with banks, while credit-worthy borrowers can get the funds they need to operate. Banks that refuse to lend can fail, as they should. And the economy will survive as it gently deflates.

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