Can The Government Fix The Crisis?

As they grapple with the financial meltdown of 2008, Barack Obama and John McCain both promise more regulation and then dip down into their partisan bag of tricks and pull out the graying rabbits: tax cuts, spending discipline, etc. etc.   Regulation might help prevent a similar crisis, the operative word being "might." The bubble began during the Clinton administration; Democrats and Republicans eagerly worked to unshackle investment banks in the late 1990s, although the regulatory philosophy that Democrats decry was encouraged even earlier; maybe the Fed didn't raise interest rates quickly enough in 2003; maybe the regulators missed signs that, in retrospect, they ought to have paid more attention to, although doing so might have shut down the economy.

And regulation won't fix anything now.

I talked to a few folks who are dealing with the crisis. As a neophyte, I asked some basic questions: what, exactly, is the problem...can the government fix it? If so, what can -- or should -- the government do?

The consensus is kind of scary.  The government, right now, needs to deal with the immediate; they need to stabilize the situation and project confidence as they do.  If AIG gets the $70b it needs to stay in business, maybe that'll be enough.

But the problem -- or "the problem" is that investment banks are paralyzed; they can't find counterparties; they can't lend money with monkeys on their backs. The monkeys, as I understand it, are hundreds of billions of dollars worth of bad mortgages. The risk doesn't disappear.

So -- basically -- the government has to take some of these things off the balance sheet, hold them for a while, and give the investment banks a clean slate.

If that sounds a lot like socialism -- like massive government intervention -- it is.

Project Two -- get the regular economy going again. Get people spending.  Tax cuts might do it, but both parties are going to have get over their allergy to deficit spending.