Looking at the big picture, I think this whole “financial crisis” is overblown and being fueled in large part by the instant, overabundance of the modern media. You won’t find a bigger advocate than me for freedom of the press, but the modern media is definitely subject to the Heisenberg uncertainty principle. This “crisis” is clear proof of that. It’s big news, and the media tends to sensationalize EVERYTHING. This serves to add fuel to the fire and results in a self-fulfilling prophecy.
From my perspective, doing nothing would likely be fine. Some Wall St. firms would collapse. That‘s bad for them, but they made their own beds, and in a capitalistic world they should lie in them. Certainly, they weren’t giving all their profits to charity (or to the US Treasury) when times were good.
Now don’t get me wrong, I’m a FIRM believer in capitalism. The beauty of capitalism is that others will jump in, pick up the pieces at a bargain rate, and make a tidy profit. In the last 2 weeks, Bank of America bought Merril Lynch for $50 billion, Warren Buffet invested $5 billion in Goldman Sachs, Mitsubishi Financial (Japan’s largest bank) bought 20% of Morgan Stanley, and JPMorgan Chase bought Washington Mutual for $1.9 billion. These firms had their eye on these prizes for some time, and they were eager to jump in and get a good deal. These moves will make all these companies much stronger and more successful.
I’ve had this opinion for some weeks now. This morning, I heard it backed up on NPR by former Fed economist and current Carnegie Mellon professor Allan Melzer.
If I am wrong and some MAJOR intervention is eventually required, then that’s an easy fix. $700 billion – $1 trillion could buy up everything toxic and easily solve the problem (if there is indeed a true problem).
That sounds like a scary amount of money, but likely some of it will be recovered when the assets are sold – perhaps there will even be a profit. But in any case, that’s only 2 times the projected 2009 Federal deficit ($482 billion), the same as the cost-to-date of the Iraq War ($582 billion plus projected interest or $300 – $400 billion), 1/3 the projected total cost of the Iraq War ($3 trillion), or 10% of the current Federal debt ($9.7 trillion).
When you’re looking at the US Federal Government, a $700 billion investment that might be paid back is no big deal.
(To set the record straight, I think that both the Federal debt and the cost of the war in Iraq are shameful. But those are topics for another day.)