The Fed wants to bailout everyone and their dog

Just read the NYTimes article
http://www.nytimes.com/2008/09/19/business/19fed.html?hp
"While details remain to be worked out, the plan is likely to authorize the government to buy distressed mortgages at deep discounts from banks and other institutions. The proposal could result in the most direct commitment of taxpayer funds so far in the financial crisis that Fed and Treasury officials say is the worst they have ever seen."

This is quite the most awful way to stem the crisis I feel.

a) The issue is not liquidity... it is the LIBOR that is so high and the fed funds that have a lower yield! ( The TED spread has spiked... meaning banks are afraid to lend to each other - banks lend to each other USD in the London Interbank market at the LIBOR rate. Since the banks don't want to lend to each other the LIBOR is quite high. While the "safe assets" i.e. the T Bills have very low interest rates since everyone wants them. The difference is roughly speaking the "Ted spread" which is high since the LIBOR is high (Ted Spread = the three-month LIBOR rate
-three-month U.S. Treasury yields)

b) The issue is ASYMMETRIC INFORMATION: - Nobody knows which bank has what toxic stuff on the balance sheet. Any banning short selling, extra lending won't take away the fact that you HAVE CRAP ON YOUR BALANCE SHEET!

c) To reduce the asymmetric information, the Fed might be better off creating a stamp of approval that banks can voluntarily get by showing the Fed their books ( or publicly declaring their assets). Qualified people can go through the banks' balance sheets and assess their risk. I am sure someone else can come up with a better plan to reduce the asymmetric information but I just wanted to put it out there.