The Fed is not done proposing, and perhaps implementing, radical plans to save the economy.
The latest installment in the agency’s heroics is a program for to buy commercial paper from non-financial companies and municipalities. It they default, the Fed might own the local fire and police departments with liens on their guns and hoses.
It will not get that bad. What is being contemplated is that Bernanke would buy commercial paper and take it unsecured, a fabulously huge risk to the federal government and taxpayers.
Now that the the Fed has decided to save the economy, it might as well go whole hog. According to The New York Times, "Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.o.u.’s issued by banks, businesses and municipalities."
The US GDP is about $14 trillion. For the Fed to do much to help a system that large, its investment in commercial paper would have to move into the hundreds of billion of dollars. It would essentially be matching the Treasury’s $700 billion bank bailout with a program of similar size for the province of business.
All of this makes some nominal sense but it leads down a terrible path. By the middle of next year, the federal government may have poured $1.5 trillion into the economy and have little or nothing to show for it. Since these measures have never been tried before, no one knows if they will work.
Douglas A. McIntyre