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It is in the prosecution of some single object, and in striving to reach its accomplishment by the combined application of his moral and physical energies, that the true happiness of man, in his full vigour and development, consists. Possession, it is true, crowns exertion with repose; but it is only in the illusions of fancy that it has power to charm our eyes. If we consider the position of man in the universe,—if we remember the constant tendency of his energies towards some definite activity, and recognize the influence of surrounding nature, which is ever provoking him to exertion, we shall be ready to acknowledge that repose and possession do not indeed exist but in imagination. - Wilhelm von Humboldt, The Sphere and Duties of Government (The Limits of State Action) (1854 ed.)

Wednesday, October 1, 2008

My understanding of the financial meltdown

In answer to my good friend, I believe this is being called a "credit" crisis because right now the biggest problem is that the "shadow banking system" is near collapse: Banks are afraid to lend to each other. If this happens, the US and global economy will pretty much halt: 60 - 0 in nanoseconds. That is definitely not good.

But this is just a symptom of the real cause: sub-prime mortgages (
again, as my good friend points out ).

I am no economist, but I certainly have my opinion. I am quite happy that the bailout was rejected in the House. But the probable effects on "average" people -- those outside Wall Street -- is real. So, my suggestion is a dollar-for-dollar bailout: For each dollar given to "write-off" a "toxic" mortgage/asset, a dollar goes to write-down the mortgage of a needy home owner; eg. one of those "toxic" mortgages. $350billion in funds for the "shadow banking system" and $350billion in mortgage write-downs.

Now I am not really happy with any sort of equal treatment between "Wall Street" and "Main Street" -- I would prefer the whole $700billion to write-off the mortgages -- but this seems reasonable: To me, not an economist.

Anyone with comments?


checkman said...

There should be no bailout of the banks any kind (dollar-for-dollar or otherwise). Bailing out the banks just props the system back up, which means we will be back in the same situation again in a few months.

I think the solution should be a multi-pronged attack: Lots of low-interest government loans for small businesses and people who are recently unemployed, small write-downs of mortgages for property values that are clearly over-inflated, cheap job training, community revitalization stimulation packages, etc.

Basically, we, the little guys, need a parachute to help ease the fall as property values drop to more realistic values (which should be seen as a good thing, long-term).

czrpb said...

I would certainly be happy w/o any bailout in the financial sector.

And I also like your suggestions.

But of course the big guys are in power so I expect some sort of bailout for Wall Street. (Regardless of how many times I trying calling! wink!)

One thing I do not understand and find disappointing to the extent that I do understand is that Paul Krugman wants to "... expand bank capital, taking an ownership share in compensation, rather than trying to push up the value of toxic paper." and "... it’s probably a lingering distaste for Evil Socialism that made Treasury go for buying toxic waste rather than injecting capital.". Any comment on what he is suggesting?