The Fed and Treasury are perplexed. Liquidity schemes like the TAF, PDCF, TSLF, TARP, ABCPMMMFLF, and the CFFF did not help stimulate bank.

Liquidity measures cannot solve the crisis or stimulate lending for reasons stated in Pushing on a String In Academic Wonderland and Thoughts On The Commercial Paper Funding Facility.

Paulson is foolish enough to force the issue and is Threatening To Take Ownership Stake In Banks to do it.

Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials. Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan, still preliminary, resembles one announced on Wednesday in Britain.

My Comment: For more on the UK “semi-nationalization” plan see UK Acts To Prevent Collapse Of Banking System. Now it seems the US may abandon the TARP in favor of a UK style plan.

This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.

The coordinated rate cut was unprecedented and surprising. Never before has the Fed issued an announcement on interest rates jointly with another central bank, let alone five other central banks, including the People’s Bank of China.

Yet the world’s markets hardly seemed comforted. Credit markets on Wednesday remained almost as stalled as the day before. Stock prices, which had plunged in Europe and Asia before the announcement, continued to plummet afterward. And stock prices in the United States went on a roller-coaster ride, at the end of which the Dow Jones industrial average was down 189 points, or 2 percent.

My Comment: The world’s markets hardly seemed comforted because Global Coordinated Rate Cuts Won’t Solve Economic Crisis.

As Washington casts about for Plan B, investors are clamoring for the Fed to lower interest rates to nearly zero. Some are also calling for governments worldwide to provide another round of economic stimulus through expensive public works projects.

Yet behind the scramble for solutions lies a hard reality: the financial crisis has mutated into a global downturn that economists warn will be painful and protracted, and for which there is no quick cure.

My Comment: Indeed there is no cure other than time, price, and replenishing the pool of savings.

“Everyone is conditioned to getting instant relief from the medicine, and that is unrealistic,” said Allen Sinai, president of Decision Economics, a forecasting firm in Lexington, Mass. “As hard as it is for investors and jobholders and politicians in an election year, this crisis will not end without a lot more pain.”

My Comment: That is one of the few reasonable opinions I have seen in the mainstream media for days on end.

Treasury officials worry that aggressive government purchases, if not done properly, could alarm bank shareholders by appearing to be punitive or could be interpreted by the market as a sign that target banks were failing.

My Comment: Now that’s ridiculous. Anyone with half a clue already knows damn well that banks are failing. Those who don’t won’t know aren’t paying any attention to what the Fed and Treasury are doing.

At a news conference on Wednesday, the Treasury secretary, Henry M. Paulson Jr., pointedly named the Treasury’s new authority to inject capital into institutions as the first in a list of new powers included in the bailout law.

My Comment: Who cares whether that’s in the bill or not? Besides, it’s perfectly predictable according to the Fed Uncertainty Principle Corollary Number Four which states:

The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

Substitute the word “Treasury” for “Fed” in the above paragraph and you have a perfect match.

“We will use all the tools we’ve been given to maximum effectiveness,” Mr. Paulson said, “including strengthening the capitalization of financial institutions of every size.”

My Comment: Paulson and Bernanke are using all the tools and then some. However, none of them is effective.

The idea is gaining support even among longtime Republican policy makers who have spent most of their careers defending laissez-faire economic policies.

My Comment: We’re all socialists now.

“The problem is the uncertainty that people have about doing business with banks, and banks have about doing business with each other,” said William Poole, a staunchly free-market Republican who stepped down as president of the Federal Reserve Bank of St. Louis on Aug. 31. “We need to eliminate that uncertainty as fast as we can, and one way to do that is by injecting capital directly into banks. I think it could be done very quickly.”

My Comment: The problem is not uncertainty. It is 100% certain that the system is insolvent. The problem is insolvency.

“The turmoil will not end quickly,” Mr. Paulson told reporters on Wednesday. “Neither the passage of this law nor the implementation of these initiatives will bring an immediate end to the current difficulties.”

My Comment: That is about the only thing Paulson has said for months that has made any sense whatsoever.

Fed officials increasingly talk about the challenge they face with a phrase that President Bush used in another context: “regime change.”

This regime change refers to a change in the economic environment so radical that, at least for a while, economic policy makers will need to suspend what are usually sacred principles: minimal interference in free markets, gradualism and predictability.

My Comment: Sacred principles? What a joke. The Fed itself is a violation of free market principles. We need a regime change alright. The best thing to do is abolish the Fed.

“The core problem is that the smart people are realizing that the banking system is broken,” said Carl B. Weinberg, chief economist at High Frequency Economics. “Nobody knows who is holding the tainted assets, how much they have and how it affects their balance sheets. So nobody is willing to believe that anybody else isn’t insolvent, until it’s proven otherwise.”

Carl B. Weinberg confuses the symptoms with the disease. The symptoms are tainted assets, insolvency, and mistrust. The cancerous disease is fractional reserve lending, the very existence of the Fed, and an unsound monetary system. The only cure is to eliminate the Fed, abolish fractional reserve lending, and put in place a sound monetary system backed by gold.

Mike “Mish” Shedlock
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