The world’s financial system is as weak now as it has been in many decades. Federal Reserve Chairman Ben S. Bernanke has a huge problem on his hands: a very wide-ranging credit freeze up surrounding financial institutions. This is a problem that mere cuts in interest rates cannot cure.

The exceptionally low interest rates of the early and mid-2000s and the continual bailing out by Alan Greenspan of any Wall Street player that got into trouble created enormous temptations to speculate with borrowed funds and throw caution to the wind, completely ignoring risk. Why worry about risk when it’s not your money and even if you get into trouble you can get bailed out? This problem is called moral hazard.

Now there’s a problem. Those speculative derivatives do not have the value that the Wall Street salesmen claimed they had. There’s a desperate race to de-leverage at almost any price. Of course, buyers have grown scarce. No institutional investor wants to add more highly overvalued speculative package to his portfolio now that the true value of these packages is exposed in the light of day. We are in a liquidity crisis the magnitude of which we haven’t seen since before World War II.

Commercial and investment banks sitting on overvalued and illiquid assets such as mortgages and private equity loans can’t sell them because they are packaged with derivatives of highly questionable value (a polite way of saying that Wall Street lied about their true value and overpriced them by billions and billions of dollars). The net result is that they don’t have the cash with which to make new loans. This lack of liquidity is killing our credit based economy. Moreover, for banks and brokers to strengthen their balance sheets by de-leveraging, it would require banks to reduce the number of loans on their books. This would devastate the economy and make what might be only a bad recession into one far, far worse and longer-lasting. The signs that I am seeing now lead me to believe there is no way of avoiding it.

Hence the bailout by the Fed, in the form of longer-term financing at the discount window. What else can they do? Let the entire financial structure of the world completely freeze up? The Federal Reserve is lending cash to financial institutions while taking as collateral the subprime mortgages and related securities of highly questionable value that cannot be sold in the open market. The Federal Reserve is becoming the buyer of last resort. This is highly inflationary. The financial middlemen are supposed to take the cash borrowed from the Fed and lend it back out again, this time to higher-quality borrowers, but this is not happening. In theory, the way this would work would be a trickle-down effect.

I suggest a trickle-up effect. This bailout is going to cost at least $1,000,000,000,000. Yes, that’s one trillion. Instead of giving that one trillion in newly created money to the Wall Street fat cats so they can continue to speculate in derivatives causing more of the same problems that we are facing now, why not give that one trillion to the people of America and let it trickle up to the fat cats on Wall Street? Don’t you think giving every man, woman, and child in the US a check for about $3,200 would help stimulate the economy and get money flowing again? That would be $16,000 for a family of five.

Why not help the entire population instead of just a few well-connected, fat cat, white collar criminal insiders? Why should they be given a trillion dollars of new money?

The government rescue of overleveraged financiers is still only beginning, and the signs that it will get bigger are everywhere. Real estate prices continue to fall. Loan funding is shrinking rapidly. First time home buyers are practically locked out of the mortgage market unless they have near perfect credit and a sizeable down payment. The vast majority don’t. The House Financial Services Committee has proposed letting the FHA underwrite up to $300 billion in loans to borrowers. The last time the federal government stepped so directly into the mortgage business was at the bottom of the Great Depression. Does that give you an idea of how bad this crisis is?

Right now we are on a path of hyperinflation. Creating a trillion dollars and injecting it into the economy is going to water down the value of our currency. Don’t buy bonds. The inflation driven by rising prices of oil, precious metals, raw materials and agricultural products has only just begun.