Why Is No One Talking About This?

President Obama:

But economic improvements do “not mean that hard times are over — 2009 will continue to be a difficult year for America’s economy. The severity of this recession will cause more job loss, more foreclosures and more pain before it ends.”

Obama also is expected to warn that “credit is still not flowing nearly as easily as it should” and that the ongoing process “for restructuring [insurance giant American International Group] and the auto companies will involve difficult and sometimes unpopular choices.”

That sounds about right, especially on jobs and foreclosures. And, yes, credit remains a sticking point. So here’s an idea: Why not reduce banks’ capital requirements a bit?

Boom — credit is created out of thin air, and the weaker banks get a little extra breathing room. If people and business are ready to assume some risk, they’ll have the opportunity, and without running up a bunch more federal debt.

During the Depression, we responded to a deflationary spiral by increasing capital requirements, and sucked even more money out of the system. That was a huge mistake. So why not reduce the required levels today?