Due to the responses another blog of mine received, I decided to make another blog that goes into further detail of why the Federal Reserve needs to rescue the banks, and letting them fail would be a grave mistake with enormous economical consequences. MSN published an article a few months ago listing the 10 biggest mistakes the Federal Reserve has made thus far in this recession. I realize it's a little early for such hindsight, but bear with me. MSN stated that the #1 worst mistake our country has made was letting Lehman Brothers fail. Once that happened, it sent investors scrambling for the exits as that meant no company is 'too big to fail.' This panic also sent a run on the banks, which is blamed for the bankruptcy of Washington Mutual, as well as the further destruction of Citigroup, Bank of America, and others. This panic spread throughout the economy and news outlets, causing consumer spending to plummet and the Dow Jones to get into the 6000's.
As a moderate Republican, I side with the Republican party on most aspects, but this issue is simply impossible to ignore. In most economies we can allow major companies to fail, as inevitably a replacement will come, replacing the lost jobs. However, we cannot allow every major bank and insurance company in the nation to fail all at once, as this panic and devastation would easily plunge us into a great depression that could take years or decades to recover from. If some major banks fail, this will likely trickle down to all the financial institutions, as they are so tightly correlated, and virtually all of them are in financial trouble. For a long time I've criticized those who compared this recession to the Great Depression because things aren't close to that bad. I believe though that if the government does nothing, and lets the economy repair itself, things could get much, much worse, ultimately dwarfing the Great Depression. Thank goodness that isn't the case, as the Fed is rescuing all the major banks that could cause us to spiral out of control.
Some Republicans believe that the best policy is Pure-Capitalism. I believe that system is just about as bad as Pure-Communism. What we need is a Capitalistic market, with the regulations that are necessary for optimal economic growth, and government intervention when necessary. I hope that doesn't sound too much like Socialism, as I'm certainly not Socialist. No one wants to relive the Great Depression, that's why I'd rather have the government spend billions, knowing that much of it will be wasted. At the very least, this optimism is getting people to spend, in turn causing us to climb out of this awful economy.
I couldn't find that old MSN article, but here's an interesting one: http://www.financialexpress.com/news/letting-lehman-go-was-big-mistake-lagarde/370911/