With everyone getting all worked up over a trivial issue, the AIG bonuses, what has gone mostly un-noticed by the chattering class, is that the Fed is going to implement quantitative easing.
What does that mean? Well here is a nice introduction (via Greg Mankiw).
Basically the Fed is going to add more money to its version of a checking account and use that money to buy up various assets. As this happens the price of the asset will rise and the interest rate fall. This, in theory, would make it cheaper to take out loans and thus allow for more money to go out into the economy and stimulate demand. However, there are serious problems with this which is why most central banks don’t use this tool. First, the central bank can lose money on the assets it buys thus leaving taxpayers on the hook. Second it could create too much inflation and even hyper-inflation. Third it can be seen as an indicator of how desperate things have gotten so it could have precisely the opposite effect that is intended.
This is actually a larger issue, in my view, than the chump change surrounding the AIG bonuses.
