Mr. Thursday’s Curious Mechanism

From the Associated Press, via AOL:

The Federal Reserve on Wednesday announced a novel approach to injecting money into the banking system as it struggles to combat a severe credit crunch that threatens to drag the country into a recession.

The Fed said it would conduct two auctions next week where banks can bid for up to $40 billion in loans, money that they will have to bolster their own reserves. It marked the Fed’s biggest concentrated effort to inject liquidity into the banking system since the Sept. 11, 2001, terrorist attacks.

The hope is that the extra funds will spur increased lending on the part of the banks and combat a serious credit crunch that has made loans harder to obtain for many businesses and consumers.

To sum: banks will bid to buy money from the government, at an interest of around 4.75%.

Having worked for the banking industry, I understand the need for this.  I can understand that banks are in need of money, and that this is a potential quick-fix to get some cash invested in the economy.  But, in the end, the government is just selling $40 billion.