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Sadly our economy needs the big banks, and in normal times they should probably be private so the government doesn’t use the banks and lending for it’s own agenda. They, in some ways, act as arms of the Fed, another private institution. What we should have done had anyone had the balls would have been to take them over and guarantee their loans and paper but just figuring our what that entailed took at least months, I am sure. We did not have that luxury of time, nor the resolve, nor the manpower to get a handle on it so we did what we had to do and started buying up those “assets” that they have had on their books for a very long time. You see, banks do not like to write off a bad debt. Usually they choose to bury it/hold it on the books so no loss is shown. Given that they only have to put 10% collateral for the money they borrow they are able to operate nearly endlessly with accounting sleight of hand.

So technically, even though the Fed balance sheet, (which is separate of the government, remember) shows a debt like they’ve never had before they also show “assets” to balance that out. Banks have to lend out the money they take from the Fed. What they all did was to buy treasuries. They borrowed at a quarter to half percent and just turned around and bought treasuries at 2–3%. Easy low risk money. Even better the more “assets” they had the more they were able to borrow. Eventually the banks got healthier and have been doing some lending to business, etc. Still it’s a far cry from what it used to be.

About putting money on the street .. that is done by the Federal Government, not the Fed, and thus that does show up in our government accounting. That is why Obama got so much pushback and the total stimulus package was under 1 trillion, most in the form of tax cuts, which everyone did take but given the crisis of the situation on the street it wasn’t even a bump in the economy. Still it’s all our reps would pass.

This subject is so deep and there are so many details.

I will just wrap it up by saying that even today the real main street economy has not recovered. Most of the money has passed thru investors and is in the markets while corporations are doing stock buybacks and m&a instead of real investing, which would stimulate the economy. The end result is that money velocity is at a low, indicating that there is not much real economic activity.

We are F’d but then maybe we have been F’d for centuries, except for the period after WW2, when we (the US) was the only game in town. We owned all the productivity of the world for a while. Still we are fortunate in that the US dollar is the reserve currency of the world. Without that we could not run the crazy debt we have. One day that could end,but it would be at the end of a long downward spiral, usually involving major world wars. But then nothing ever lasts forever.