Let's start at the beginning...

Is there a liquidity crisis? Everyone says there is one, so it must be so, right?

Not so fast. At least as of September 17, banks were still lending:

To consumers:



And to businesses:

(From Carpe Diem.)

Apparently, what they are not lending to is each other, but, since the Fed is throwing money at them as fast as they can, is that really a problem?

And, more importantly, is it a problem worth the kind of bail out that has been proposed. Remember that there should be these down-sides to the current proposal:

1) By subsidizing risk, you get more risk. Why wouldn't someone give a big loan to someone on welfare or an illegal immigrant? (WaMu was famous for recruiting illegal aliens for their loans--a little bit of federal law enforcement and a slowing economy, the aliens decide to go home--leaving WaMu high and dry and a subsidiary of JP Morgan.) If the loan pays, they get the money. If the loan doesn't pay, they still get the money--from the taxpayers. It's a win/win for them, and a lose/lose for the rest of us.

2) By preventing bankrupt banks from going bankrupt, you keep stupid bankers in office and diminish the standing of the well-run companies. Why run a company well, if it doesn't matter in the end?

3) By not removing the fundamental problem of Fannie and Freddie's pushing hard for highly risky loans, you do nothing to stop the same loans going forward. The cycle is poised to begin right up again.

As a side note, I don't see anyone worried about inflation. Econ textbooks would tell you that when the Fed throws money into the economy, you get inflation. Will that happen? and if not, why not?