Fed's Massive Secret Wall Street Bailout Still Going Strong

Remember last fall, when our government explained that the reason we needed to give $800 billion to Wall Street was so the banks could lend it back to us and shock the economy back to life again?

That was a happy story!

And we fell for it.

What happened, of course, was that the banks took the money, stopped lending, and used it to pay themselves and their shareholders through the nose.

Twelve months later, the banks still aren't lending, and we're still bailing them out hand over fist.

By lending the banks money at zero interest rates, the FT's Martin Wolf says, the Fed is helping the banks recapitalize themselves.  The banks aren't lending because they're still trying to recover from all the lousy loans they made three years ago (and because there aren't all that many folks to lend to).  So there's nothing else to do with the money other than hoard it, buy safe Treasuries, and pay huge bonuses.

It's annoying to watch banks that would have collapsed a year ago now minting money at taxpayer expense.  But that's the way monetary stimulus always works.

Wolf, however, believes the public's outrage over the bailout and bonuses will drive Congress to pass some kind of financial reform.  And, in an ideal world, he'd also like to see a windfall tax levied against bank bonus pools, which he says serves "no economic purpose."

The important questions for the economy and market now, says Wolf,  are whether the Fed will remove the stimulus in time to stave off inflation, and it does, whether the removal will hobble the economy.