How is it that the Average American on Main St. could be hurt by a complete collapse of the financial sector of the economy? The answer is that he/she would only suffer IF aggregate demand were to drop as a consequence of banks lending less money and businesses investing less. When aggregate spending levels drop, jobs are lost. If/when banks stop lending, then aggregate demand (= SPENDING) will begin to collapse in earnest, just as it did in the early years of the Great Depression. That is really the one thing that Democrats should be worried about.
But it is not necessary for them to concede to the Republicans' plan to throw billions of taxpayer dollars at rich people, just to keep the whole mess afloat for a while longer. A much better option would be for Congress to start getting into the banking business directly, creating Taxpayer Banks that are fully capitalized with taxpayer money, and more than ready to lend money to households and non-financial firms, while the meltdown on Wall Street continues to punish those who gambled recklessly. It could, for example, re-finance mortgages that some homeowners are currently struggling with.
If demand for loans is too weak to sustain the economy, then Congress can simply spend more money on public investment. Allocate a trillion dollars the the Taxpayer Bank, and then spend another trillion on much needed public investments: more highways, modernized highways, state-of-the-art sewerage systems, a cleaned up environment, more teachers, more classrooms, smaller class sizes, an improved quality of education, more police officers, national health care, etc., etc., etc. Big increases in government spending on these INVESTMENTS would create millions of good paying jobs to replace the jobs temporarily lost while financial companies are going out of business.
It's a good thing to keep in mind at this crucial time that The Great Depression continued on as long as it did (1929-1941) for only one reason: the Federal Government never spent enough money to eliminate unemployment until World War II began. Once that drama began, the government increased its expenditures dramatically (on weapons, the training of soldiers, etc.), unemployment dried up almost over night. Roosevelt's Congress did not authorize enough spending to end the Depression in the 1930's because too many members of the opposition and the banking community warned that the consequences of 'inflating' the economy would be disastrous. Too bad they listened. Millions of people suffered terribly for no good reason.
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