Alternatives in brief

I just posted this in the comments on an earlier post, it seems worthy of it's own post:

migou said...

So what, if anything, should be done?

October 1, 2008 7:55 AM

I'll try to get a whole post on this today or tomorrow, but briefly:

I would prefer to see nothing than anything like what's been presented so far. Bankers/traders have made some horrible decisions, seriously underestimating risk (or worse, acting as if they knew they would be bailed out when things went bad). The banking industry (really the entire financial services industry) is too large and needs to get smaller.

Since it's such a large part of our GDP, this means a slow down or recession is inevitable to some degree (it's a matter of how hard and how quickly it's over). Since consumers are over-leveraged, and consumption drives our economy, there's bound to be some contraction in GDP from a slowdown in consumer spending as well.

Anything that props up Wall St. or debt-driven consumer spending cannot be sustained, so these problems will just resurface down the road (or we'll be dragged through a decade-long (or more) slump where things aren't like the Great Depression, but it'll be tough to get a decent job, buy a house, etc.

Politically, it is very unlikely that we'll see this happen. So if something has to be done the focus should be on shoring up the credit markets. This is where businesses are running into trouble with short term financing and what is meant by affecting Main St.

A decent start is here:

Another alternative is here:

I think the second one from itulip is pretty easy to grasp.

Nothing is guaranteed to work (we still have the underlying problem of too much leverage/credit in our system), but the Paulson plan and every derivative of it so far are guaranteed to fail.

They do not address the main issue of banks willingness to lend and business and consumer willingness to borrow. The system cannot function without those two things.