The Sorcerer's bailout apprentice

On Mickey Mouse's 80th birthday, there's a poetic irony that the hapless Fed is bumping into the unintended consequences of its leniency to the banking sector. It turns out that some of Fed's commercial paper and short term debt facilities are being used by banks to avoid recognising losses on their loan books. I recognise that the liquidity crisis needs some sort of government response, but polluting the Federal Balance sheet is not a smart way of getting there.

When this state of affairs is challenged, the standard response is that it is necessary to get the interbank lending system unblocked. Unfortunately, according to the Fed's own figures, this is simply not true - lending has actually grown. This crisis is too complex for blunt force measures, but instead policy makers continue to pump valuable liquidity into the wrong areas. What is needed is a reload of the corporate debt market. In a prior posting, I suggested using those TARP funds to support fresh and clean investment grade issuance. As a taxpayer, would you rather own senior GE debt or a junk pile of subprime mortgages?

So what should we do? Frankly, I'm tempted to drive down to Anaheim and stock up on Disney Dollars. At least they might still be worth something in a year's time...In Mickey we trust?