On Monday, the Federal Reserve decided to outline rules for banks seeking to repay bailout funds. The rules apply to the 19 largest banks in the country that have received $228.6 billion of the Treasury's $700 billion financial bailout package.

This announcement is part of an attempt to slow all government support of banks. Banks are trying to distance themselves from the rules attached to the bailout money, which include limits on executive compensation. The banks have to apply to their primary regulators for permission in order to repay the money.

The Chinese central government is putting brakes on almost all bank lending to both individuals and commercial enterprises. The freeze will last at least until the end of this year. According to The Wall Street Journal "a China Banking Regulatory Commission official here confirmed that local and Chinese subsidiaries of foreign banks have been asked to ensure that loans at the end of the year don't exceed the total outstanding on Oct. 31."

While the move may help bring down inflation, it could also cause a nosedive in China's consumer spending and stock markets. It is broadly assumed that much of the money going into stocks traded on the Shanghai exchange comes from borrowed funds. Since the index for those shares has more than doubled, the borrowing seemed wise, at least for now.

Although much of the goods and services production in China goes overseas in the form of exports, the country's new middle class has also created a vast pool of consumers.

The government is taking a dangerous gamble, but it may be necessary. An overheated economy could lead to hyper-inflation as more money chases fewer products, homes and company stock shares. If the stop is too abrupt, however, the Chinese economy could fall over itself and drop into a recession. Cutting off lending completely is too large a risk to China's GDP growth.

Douglas A. McIntyre is an editor at 247wallst.com.

Yesterday I was raked over the hot coals by several readers that feel we are doomed by a housing bubble that I would not accept. See: Housing Truth from Main Street; which turned out to be quite a controversial post.

I stand by most of what I wrote. However, there were plenty of valuable insights that are worth reflection among the ranting and raving. A particular comment by David Gross, although not very deep is important for its simple summary of many comments. It stimulated a response from me that I thought was worthy of a separate post and further discussion.

David's Comment