Allan, some things and some ideas and some people need to hit the wall, but I agree that we don’t want excessive collateral damage. I just think that wanting no collateral damage is unrealistic.
In practical terms, I’ve thought that our govt should:
1. Identify the weakest 40% or so of the banks and some % of some other financial institutions.
2. Guarantee the obligations of all financial institutions for a transition period (of, say, 6 mos)
3. Wind down (liquidate) the weakest institutions over that transition period. Move any remaining operations that must continue (not the underlying financial assets or liabilities) to the remaining institutions.
4. Top up the capital of the remaining institutions by just giving them a govt handout equal to a fairly level % of their assets. Let real market asset prices become public and prevailing, and adjust the capital handouts to give the remaining institutions a healthy start.
5. After this is done, the remaining fin’l institutions will be profitable and well-capitalized. The ones that managed best will be the best capitalized and capable of handling all the legitimate business that needs doing, and the ones that were very marginal will be the least well-capitalized and will have to improve to survive. Most should survive, because only 60% are left.
6. While the fin’l sector is being ‘right-sized’, extend and increase unemployment benefits. No homeowner bailouts or other channeling of money in support of unproductive activity (buying ever-bigger houses).
The idea is that the real economy needs to change, and the number one need is to get many people out of the business of “managing assets” into other activities. When asset prices are rising, it is easy to believe that “managing assets” is productive even if it is not. So don’t resist the quick downsizing of financials.
Don’t resist the drop in asset prices. The drop in asset prices is just the economy’s signal that we can’t afford to have 1 baby boomer pensioner on the golf course in 2025 for every 2 workers. As baby boomers see their asset prices decline, they will have to plan to work longer, which we need. Baby boomers in their 70’s and 80’s are going to have do much of the work of providing other baby boomers with the services and goods they need. It’s just not going to work to have a huge generation of people living comfortably on fat 401ks and other people’s labor instead of continuing personal contributions and paychecks.
I am no left-winger, but I do think Obama is on the right track with his (stated) focus on reducing the cost of health care, and reducing our energy imports from “people who don’t like us”. So I am all for hard-nosed efforts in that direction too.
