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We should have let the free-market work itself out.
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Unfortunately, that would be a one way ticket to 1929. We face a very real problem that has nothing to do with bubbles or rich getting richer, no matter what the root cause is.
The system is so shaky at present that banks won't even lend to other banks overnight (the interbank market) due to capital hoarding and mistrust of counterparties' solvency. The recent raising of the FDIC guarantee is simply there to prevent runs on banking deposits that would make the matter worse.
If the banks don't lend to each other, they don't lend to the largest AAA or AA rated companies (witness AT&T and GE saying that they can't access the short term lending market, "commercial paper".)
If the highest grade borrowers can't get access to funds, they can't generate sufficient cash flow to buy inputs or meet the payroll. GM has closed its European plants until year end as a result. If they can continue they end up stretching payables out to 60 or even 90 days, which destroys the small and medium enterprises (SME) who supply these inputs and have even less liquidity than the big guys.
These SME companies are facing 30-50% higher margins on their borrowing costs on their overdraft or revolving credit lines, if they can keep them open. Their margins get pinched and they go out of business due to liquidity shortfalls. As we all know, it is the SMEs that employ most of a developed country's labor force.
The problem gets worse for farmers and others relying heavily on credit to get through seasonal ups and downs.
Good luck getting any consumer credit.
If the government doesn't unlock the system at the top, the whole thing falls apart. Wall Street is Main Street, like it or not.
The real worry is that due to political brinksmanship, everything that is being done may be too little too late. The markets continue to react very negatively on a daily basis despite unprecedented, and I mean never before seen, actions like the coordinated central bank interest rate cuts that happened today.
Even if they can get things moving again from a liquidity perspective over the next few months, we have a significant chance of sustained recession (we are already in one) because the US and global consumer is tapped out and won't be able to spend us to growth.
Our chief economist (oh BTW, for those of you that don't know, I work for one of the largest investment banks) is predicting that the US Government, regardless of who is in the White House, will have to undertake massive infrastructure projects to get things moving just like during the 30s (TVA, highway system, Hoover dam, etc.). They are also predicting that global GDP growth over the next 12-18 months will almost entirely be driven by the Chinese consumer/economy.
Rosy picture, huh?
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I think I overserved myself and got angry
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Jude, I think everyone deserves the occasional booze induced rant
