Bolling: Central Banks Should Go Long

Here is where we differ, however.

I think a big part of the freeze is the stock market. I think banks have seen Bear Stearns, Fannie(FNM Quote) and Freddie(FRE Quote) and AIG(AIG Quote) stocks getting systemically decimated and have tightened their lending.

Then Lehman was allowed to fail, and they froze all unnecessary activity. When WaMu and Wachovia came within hours of failing (and remember those were after Lehman went belly up), there was little anyone could do to convince lenders to lend. Lenders became hoarders.

Cheap money wasn't going to help. Lowering fed funds, opening the discount window wider, paying interest on collateral left at the window, even offering $700 billion to take "toxic" derivatives off balance sheets wouldn't do the trick. Not when a bank might see its stock getting destroyed in the matter of a few hours.

My idea. I think solving this crisis in confidence relies on the markets' ability to stop the free fall. I believe that if the central banks would buy equity in the top 200 companies on their own stock exchanges, these markets would stop falling. There would have to be agreement that the central banks would buy ample shares in their best companies. It should also be known that these shares would be set aside and available for sale at any time. They would not be put to the market, but if the market demanded them, they were to be sold back at a time when the world economic picture stabilizes. They would be nonvoting preferred shares that would eventually come off the government books.