Since the public is basically bailing out “the financial system”, then: the public should, in some sense and to a substantial extent, be given “ownership” of the financial system. I don’t mean just ordinary individualized market participation (which they already have, however mangled) or just “the government” acting as a government (especially considering that the G. is largely, effectively owned by the same sort it is bailing out the most.) I mean literally “as” the public, in a communal effective way similar to what being in a genuinely employee-owned company is like. Reflect on that and hash out what it should consist of in particular, the thrust of it cannot morally be denied. The people should demand it, they will if they appreciate what happened to them and respect their interests.

The more accurate biological example is of a population depleting its resource base and crashing, which is a matter of measured inevitability, rather than potential failure. The paper bubble was being inflated and each tear was papered over with ever thinner paper. It wasn’t a change in circumstance, but reaching the limits of the circumstance.

Neil,

The irony is delicious. After years of privatizing every possible public asset in the name of “greater efficiency,” while squeezing out every drop of profitability, the “free markets” rejoice when the mess is nationalized. Fear and greed are all that really matters.

Another serious problem is Wall Street’s deeply ingrained tendency to push the envelope. (Richard Lowenstein put it exceptionally well in his book Origins of the Crash: “Finance has its own Peter Principle, by which a successful model will be adapted to progressively riskier causes until it fails.”)

In this habit of fighting for every inch of profit, Wall Street is like a self-evolving animal overquick to embrace the particulars of its immediate environment. The more precisely an animal is attuned to a particular “fitness landscape,” the better that animal can thrive… in the short term at least, as long as everything stays just so. To be exquisitely adapted (as opposed to robustly adapted) is to be vulnerable to the slightest change.

Thus when the fitness landscape does change—as it inevitably will—the heavily specialized competitors tend to get crushed (if not go extinct). If a strategy-gone-sour broadsides a large enough group of market participants, the entire financial ecosystem can be thrown into turmoil. When the turmoil from this upheaval spills into the broader economy, wreaking havoc in its wake, the “demon” spoken of in the book’s title is unleashed. (As this reviewer interprets it anyway.)

http://news.yahoo.com/s/ap/20080916/ap_on_bi_ge/bank_deposits_safety

Federal bank insurance fund dwindling

By MARCY GORDON, AP Business Writer Tue Sep 16, 7:49 PM ET

WASHINGTON – Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.

The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation’s largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.

…

Yup. At this level:

On Monday, New York Gov. David Paterson tried to give the company some breathing room by allowing AIG to access some $20 billion of capital in its subsidiaries. That might not be enough.

“I think AIG has a day” to get a deal done, Paterson told CNBC on Tuesday morning. “I don’t know if anyone is really understanding the ramifications of this crisis. We’re in a terrible situation if we let the world’s largest industrial and technical insurance company go down.”

Experts agree that the failure of AIG would have tremendous consequences for the financial industry. It has insured some $441 billion in fixed income assets for banks and other investors. Because of that, most major banks have significant exposure to AIG.

Again, the theme: Instruments ostensibly introduced to manage and hedge against risk have become the risk, on a gargantuan scale. As economist Robert Merton said in a recent interview for Technology Review, the trouble is, when you give people an SUV instead of a compact sedan, some of them think they can take risks on the highway they never would have taken otherwise. Throw in greed, relentless selling, and free market snake oil, and here we are.

(Actually, those people didn’t just get SUVs, they got buses—full of passengers.)

At some level, everything is connected. Investment banks were leveraged 30 to 1, while commercial banks are leveraged 10 to 1, so at some level of loss they are all under water. Then the question is at what level the FDIC is leveraged at. I think it is at something far more than 10 to 1. After that, it’s the Treasury and after absorbing Fannie and Freddie, it is already under water. Paulson had a bazooka, but it only had one shot.
After the financial system itself, the corporate world applies the same “just in time” leveraging to its finances, as to its production models.
Then there are credit cards…..
It is all one big bubble and it popped.
Think of the subprime crisis as the planes flying into the WTC. Yesterday was when they started to collapse.

Oh, dear.

Who is better suited to make money than highly educated, smart people? My bet’s on the outlandish, brazen, manipulative and ruthless people who can afford lots of lawyers, and who give money to highly educated, smart people to do their bidding.

I think the main problem is that there isn’t a voice for any of this. The US government’s (I assume you’re American) blind priase of free market capitalism comes from the fact that there are very few politicians willing to stand up and say that Ronald Reagan was wrong, that Reagannomics set us down this road of spiraling deficits, credit crunches, low savings, a massively expanded military industrial complex and bank bailouts.

Until someone is willing to directly say that Reagan was wrong, and that his economic policies have lead to nothing but ruin, we’re just going to repeat this over and over. Perhaps, if Obama wins big, we might get something like that. I’m not holding my breath.

(b) Everything is not that connected. As I said, independent broker/dealers are not connected to the normal (FDIC insured) banking system. And that is why the bailout of Bear Stearns by the Federal Reserve using $29B of taxpayer’s money (Bear Stearns not even a member bank) is such a profound corruption. The government (mostly the Bush administration executives) implementation of a free-wheeling no-regulation ideology under the guise of ‘free market’ eventually led to Wall Street broker/dealers running their businesses, and your money, like a casino. The FDIC banks, strictly regulated by banking laws, dared not go to the same extent for fear of criminal implications.