Till now, the Federal Reserve has mainly been offering bailouts. As one or another institution readies to collapse, they've judged the significance of the bank and either buttressed it with taxpayer money or let it tumble. The new strategy is different. It's a "systemic fix." These banks are falling because they have too much in the way of risky paper (investments). The Federal Reserve is now talking to Congress about using taxpayer money to buy up the paper directly. The basic theory is simple: These risky investments are having an amplified effect because they're taking down financial institutions with them. If the government controls the assets, then they're still going to lose a lot of money -- we're talking hundreds of billions in taxpayer funds -- but the damage will, at least, be contained to the simple losses incurred on the investment. In effect, it quarantines the infection, so it can no longer spread unpredictably. On the other hand, the American taxpayer is smack in the middle of the quarantine zone. In addition, the Treasury is using the Exchange Stabilization Fund to back money-market investments, a smart move to ensure that pension wealth isn't wiped out. In case you were wondering, the Exchange Stabilization Fund is the same fund used in the 1990s to bail out Mexico, a developing economy that was facing collapse. Now it's being used domestically.
