The Volcker Option

If the bailout fails to stimulate lending, we need to go the other way. The Federal Reserve should pull a Paul Volcker and jack rates up.

Why? Housing is still the problem. And lending at current valuations won't do a thing, because we STILL aren't allowing prices to collapse to reasonable levels. Owners of real estate need to demand vastly less for property in the short term, only VERY credit-worthy borrowers should be able to hurdle high interest rates and massive credit constrains, and all that excess inventory needs to get bought. Then, in a few years, those high-quality borrowers can refi.

Ironically, the hope them is to create another credit bubble.

Credit bubbles can do one of two things. They can vastly stimulate domestic industries, like in the 1980's after the last Volcker move. They can also transfer trillions of dollars to foreign sovereign banks, like in 2001-2008. Guess which version creates long-term economic sustainability? Every credit bubble is a dice-roll that innovation and private enterprise winds up creating huge new value-added sectors of the economy. Sometimes you get a whole pile of plasma televisions made by Asians. Let's hope for the former.