With talk this morning of a plan for the Fed to set up Special Purpose Vehicles -- remember Enron? -- to buy up Commercial Paper (CP), a shrinking $1.6 trillion market of month long loans used to pay employees and buy inventory, we are now getting to the point where the Fed and the Treasury are the only bank that's still making loans. And with the new SPVs it looks like the Fed is running out of money to sop up all the financial toxic waste. The other banks seem to be frozen by fear. They borrow money from the Fed and clutch it to their breast, unable to trust that it they lend it to others that it will get paid back with interest.

But the good news for the time being is that the world still thinks of U.S. treasury bills as the safest place to park money. As a result, the Treasury can sell an apparently unlimited quantity of them to investors around the world and pay virtually no interest in the bargain. As long as this continues, it creates an opportunity to put that money to some positive use -- instead of throwing it at the world markets and watching value evaporate -- e.g., $2 trillion has disappeared since the $810 billion bailout bill to save us from heaven's wrath was about to pass.

The Fed could charter, say, 100 new banks around the country. These banks would be capitalized by a combination of money from the Treasury and private investors. Their deposits would be insured up to $250,000 and they would be required to lend out no more than $10 for every dollar of capital. They would be run by experienced bank executives who had been carefully vetted for their lending prudence. And because of their pristine balance sheets, they would be comfortable lending to each other -- knowing that they could get more capital if needed.

Continue reading Memo to Washington: Start 100 new banks

Memo to Washington: Start 100 new banks originally appeared on BloggingStocks on Tue, 07 Oct 2008 11:05:00 EST. Please see our terms for use of feeds.