What now? It’s very simple, we need a shot of adrenaline to get lending going, until there is time to deal with the larger crisis at hand. The bill that should be crafted should be designed to get us through to January, and to give us time to work on a more comprehensive and fairer redesign, not bail out, of the banking system.
The principles are simple and have already been ennunciated:
1. Give the FDIC an injection of cash to buy out banks that are too insolvent to lend. “Too sick to lend is too sick to live.” You would be amazed at how many will start lending in preference to working for their Unle Sam.
2. Sell short term bonds and give these to the Fed to extend lines of credit at the average of FF and Libor. This will make use of the arbitrage play that Paulson saw of dirt cheap short term money in the flight to quality. About 150 billion in addition to the Fed’s already eased credit will do.
3. Back the bonds long term with “fat cat taxes” and insurance fees on a wider array of financial entities.
4. Signal that the policy of allowing banks to be bought up cheaply is over.
That’s what needs to happen, a shot of adrenaline to get us through to January.