Yesterday the Fed announced, not one, but two major lending programs: 200 billion for consumer credit and 600 billion for mortgages. This is the Fed moving further into the "Bank of the Fed" approach I advocated during discussion of the TARP bailout. The Fed is effectively taking "deposits" in the form of Treasury bill purchases and using the money to make loans to private entities. The loans are currently being made indirectly, by supports to private bank lending, because the Fed lacks the infrastructure to evaluate individual loans.
This has engendered a lot of concern about wasting money and crowding out private lending/borrowing; of which some concerns have made it to the mainstream media. These concerns are legitimate; during the TARP controversy I was particularly concerned with the Fed crowding out essential lending to make wasteful loans. However, I think at the moment there's just no choice. For whatever reason, banks are unable to convert virtually free money from the Fed into consumer and commercial credit except at exorbitant rates. We need credit for our society to function and apparently nobody but the Fed can do it.
Lending by the Fed, though, may very well drive what's left of the banking system out of business. The Fed has access to unbelievably cheap money; at this writing it can borrow for 3 months at a rate 0.04% (free, essentially) and for 30 years at the astonishing rate of 3.52%. There's no way private banks can compete with that. If the Fed loans to some people but not others it is effectively providing an enormous subsidy to the favored and will create monster distortions in the economy. In addition, the Fed will face severe political pressure, as we've seen with the attempt to give away the farm to the banks while the auto industry gets crumbs. So I think the Fed will have to be relatively even-handed in its lending, and this is going to leave the Fed dominating most lending much as Fannie and Freddie now dominate mortgage lending.
So in the very near future we will likely have a de facto nationalized banking system, with governmental standards determining who does and who does not receive loans. Good or bad, it's now basically inevitable since the private banking system used the freedom provided by deregulation to go out and commit suicide. It is truly ironic that the mad drive to deregulate of the past 25 years will lead to socialism on a scale not even considered seriously in America before. But, that's the situation, and we now have to start thinking about how the government will run the bank.