[furiouslol]

it is better to have cash on hand in case their own asset-backed securities become worthless. Even lending it to a __perfect borrower__ is riskier in that case, because even if the borrower can repay, it's no good to the bank if they need the cash in a pinch.

In other words, the issue here is that the banks are reducing their leverage and not because they don't trust each other, which is my main point. If the Fed inject so much money into the banks that they can afford a few loan defaults here and there, the credit market will start to go back to precrisis levels. An interbank lending guarantee without the capital injection won't help much.

[Xichekolas]

Conversely, if the Fed sets a price for troubled assets, each bank will know where they stand, and they won't have to hoard cash any more. Those banks that made bad decisions will fail, as they should, and those that didn't will see confidence in them restored.

A direct capital injection offers blanket protection to all banks, good and bad, and does nothing to discourage this from happening in the future.