Defibrillator For A Corpse Regardless of your position on government spending and its effects on the economy, without solvent and functioning banks, there will be no economy to stimulate. If we continue to ignore the fundamental role that banks play in our economy, debates on government spending versus lower taxes will be had over burning garbage bins and cans of beans.
Our economy requires functioning credit markets in order to operate. Credit markets have grown to become dependent on the broader financial system because of the way in which credit risk is traded and distributed. Therefore, without functioning, solvent banks to create and manage these markets, and without investors confident in the stability of the broader financial system, our economy cannot function, no matter how much money we throw at it.
Despite this, the current administration has thrown all of its weight behind a gargantuan spending bill without first solving the core issue that precipitated and underlies the crisis: bank insolvency and illiquidity. This influx of cash may stem the tide by keeping certain businesses and consumers afloat with government cash, but it does little to nothing in the way of restoring stability and confidence in the financial system. In short, no matter what your economic philosophy is, pragmatism dictates taking action to restore the viability of the banks.
Originally published at Derivative Dribble and reproduced here with the author’s permission.