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The Fed's Binge
...This means that the total bailout is not the $700 billion that Congress appropriated, but at least $1.2 trillion. And that figure doesn’t include the Fed’s mid-October promise of $540 billion to bail out money market funds, which if not covered by the Fed’s sale of other assets, will require either further monetary increases or further Treasury borrowing. Thus we now have the worst of both worlds: a massive bailout financed both by Treasury borrowing (in order to avoid inflation) and a Federal Reserve increase of the monetary base (which heralds future inflation anyway).

Of the $1.2 trillion increase in federal government borrowing, at least half took place within the space of a month. This sudden 25 percent increase in the outstanding national debt qualifies as the most dramatic peacetime experiment in fiscal stimulus the U.S. government has ever implemented. If Keynesian theory were correct, the economy should have been well beyond the reach of any potential recession by the end of October. But how many economists are going to acknowledge this striking empirical refutation of the fiscal policy they hold dear?

This enormous increase in government debt may at least partly explain the sudden stock market collapse after the bailout passed. Government borrowing represents a future tax liability, and expected future taxes affect the value of equities. Some argue that this new borrowing may not increase taxes at all because it merely finances the purchase of earning assets that the government can later resell. While that’s certainly possible in the long run, no one knows the true value of those assets in the short run. After all, the market’s anxiety about their worth was the justification for the bailout in the first place. So now the government is transferring that uncertainty from private financial institutions to the taxpayers....