The Doom and Gloom post of 2 days ago was prompted by a comment thread on Bizzyblog. The primary participant of that debate has asked to keep the discussion going in an open thread. Tom, the owner of Bizzyblog has suggested we move the discussion here and I am open to it.
I will post his first comment here and continue the discussion in the comments. I hope you follow along.
If we had to spend $150 billion, it should not be thrown up in the air to shower down aimlessly in the vain hope some of it will keep things going in a pump priming effort. Pump priming was always a failure in the long run since it never addressed the real economic issues, since it was throwing money at a problem instead of targeting the problem.
The problem as I understand it, is focused upon the solvency of the banking system to make home mortgages. Without the loans, essentially houses can not be bought or sold, few people have $300k in their pockets. The government would be better off injecting the $150 billion into Fannie Mae or Freddie Mac to undo the credit lock that has brought everything to a screeching halt. Secondly, any loans created by this injection would be disqualified from any derivative hedging action. It's ok to package a group of loans, but it's not ok to hedge them, the risk of default must be born by the mortgage borrower in the amount of the interest rate charged. In my mind, the amount of interest charged is no different than a credit card account, except with the important distinction of collateral. Then at least in 30 years time, we will get most of our money back ($150 billion) with interest.