the topdown solution to the crisis is AN UTTER CATASTROPHE

I hear the roar of big machines
Two worlds and in between
Love lost, fire at will
Dum-dum bullets and shoot to kill, I hear
Dive, bombers, and
Empire down
Empire down


The economists, pundits and our elite have patted themselves on the back for the past year about “handling” the “credit” crisis. They have handled it by pouring money into the pockets of the top earners, who are, not coincidentally, the people who run the financial sector. Manufacturers in this country – GE, GM – have, for a long time, gotten in on the racket by manufacturing financial centers themselves.

Was there a better way?
How about: bottom up financing?

A clever commentator over at Mark Thoma’s Economist’s view named James Kroeger has been pounding on this idea for a while. He put it very succinctly before, once again, the Fed took another step into the quagmire. I have to quote him:

Let's go through this a step at a time... How would the Average American be hurt by a complete collapse of the financial sector of the economy? The answer is that he/she would be hurting only if aggregate demand were drop as a consequence of banks lending less money and businesses spending less money. Without intervention by Congress, businesses that are too heavily leveraged would go out of business and many people would lose their jobs. But if the federal government were to increase its spending enough (by taxing the rich and spending that money on infrastructure & human capital) aggregate demand could not only be maintained, we could also easily increase AD if that is what we wanted to do.

To maintain aggregate demand at the levels we desire, it might be desirable for Congress to create taxpayer-owned banks that would buy up the assests of failed private banks at fire-sale prices, fully capitalize them with public funds, and then provide whatever loanable funds might be desired by borrowers. If loan demand is inadequate to maintain aggregate spending at the desired level, then Congress can simply spend more money on public investment.

So what's the problem? What's the horror? The evil geniuses who created our private financial markets would suffer massive losses because they did not prepare themselves for excessive risk. They would lose Big Time, as they should. Within a month of two after such institutions fail, the government could be replacing them with publicly owned entities that have no reservations whatsoever about lending to would-be borrowers.

It would all be over within 6 months and very few people would be unemployed while competing firms buy up the assets of failed firms. As long as demand is strong, everyone would be working and pumping money into the economy at the same time that the few remaining players in the privately-owned financial sector are finding new ways to make a living while competing with The Taxpayer's Bank (one that is not interested in maximizing profits while taking on risks that everyone else must pay for, but only in serving the public interest) and which writes the rules that they must abide by.
(If a reminder is necessary: the Great Depression continued on as long as it did for only one reason: the Federal Government did not spend enough money to eliminate unemployment until World War II began and then unemployment dried up almost over night. Roosevelt's Congress did not authorize enough spending because too many members of the opposition and of 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.)

This is an awesome suggestion. It will be completely ignored by all parties and all people in power. But LI suggests that readers intrude this idea into forums where the economy is being discussed at present – q and a on the Washington Post or the NYT, comments on any popular political site, etc. At the moment, the top down, top benefits most model is the only model on display. It is late. That model is a failure. And it may well lead to the complete failure of a perfectly good economic system. The naughties have been an experiment in how-stupid-can-we-be. It looks like we will drain the betise to the dregs. But we don’t have to. We have a choice.