Paul, Paul, Paul... I love you as one of my favoritest economists of all time, but I don't get why you have simply decided to suspend your analytical talents when it comes to this threatening economic drama. You appear to simply accept the notion that a collapse of the financial industry is guaranteed to take the real economy down with it. But why? Please try to use your creative mind and your knowledge of economics to contemplate other possibilities.
Yes, it is true that if nothing effective was done by the federal government, a collapse of the financial industry would take the economy down with it. But there are things that Congress could do to sustain and invigorate the economy even as the privately owned financial sector is collapsing in historic fashion. This is not difficult to reason out.
The primary reason why the greater economy suffers whenever a moral hazard hurricane hits the banking sector is because lenders become more reluctant to lend and borrowers (including firms) become more reluctant to borrow, causing an overall drop in aggregate demand. That is what happens if/when Congress does nothing to intervene. But if Congress were to authorize the executive branch to buy up all those failing financial firms at fire sale prices and then immediately re-capitalize them with taxpayer funds, it would be possible to sustain total levels of lending at pre-crisis levels at the same time that private banks are failing left and right.
It makes no sense for economists like you to simply sit on the sidelines wringing your hands at the thought of a failed private banking industry. There is almost nothing that our wonderful private banking industry has done for us that a public banking system could not also do for us. Please...someone...provide a list of the great benefits that private bankers have brought to society through their diligent efforts at competitive obfuscation. Creative debt instruments? That---in addition to an incredible lack of moral hazard---is what has caused our current problem.
They have not brought us blessings, but only the threat of great hardship due their profound greed.
Congress can replace the lost lending through the introduction of public banks that arise from the ashes of failed private banks. If this were done, Paul...if Congress were to create fully capitalized banks just as quickly as the private banks fail...then how could you still think that the collapse of the financial system would be some kind of disaster?
Please give this some additional thought....
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