That is actually not the question. Not now.
The time to ask that question was four, five, six, and more years ago. The time to ask it was when the shadow banking system started growing. It was invented to avoid regulations. It made a lot of money doing it.
While the party was on, while yee-haa mortgages were driving up real estate prices and making everyone feel richer, while loans on that inflated home equity were keeping the economy afloat, nobody wanted to be the wet blanket on the house of cards.
That’s the real problem. No amount of new oversight bureaucracies will change the fact that when a party is on, nobody wants oversight. We had plenty of oversight in place. We just didn’t use it. The real solution to the current crisis would have been not to get drunk at the party in the first place. Anybody reading this blog already knows that. (So why am I saying it? I dunno. Just venting, I guess.)
But now what? Why should the innocent get stuck paying the bills of the guilty?
Because there’s no other choice. Not now.
The current bailout plan is estimated to cost about $2000 for every human being in the country. Leave aside the question of whether we may eventually recoup some or all of it. Say we don’t. Let’s also assume that’s an underestimate, which is probably a safe bet. Let’s say it’ll cost $4000. (I’m getting most of my information via Krugman  and Calculated Risk . They have good analysis and lots of details. The $4000 figure is not from them. That’s just my pessimism.)
We don’t have a choice between spending $4000 or saving it for, say, a college education. At this point if there is no bailout, the global financial system literally would collapse. It was flirting with that on Wednesday last week. A financial collapse would shrink pension funds to shadows. You’d likely lose your job. Crime would skyrocket. That’s expensive for everybody, and beyond price for it’s victims. The list of ways a financial collapse would cost you goes on forever. It would cost you $4000 in the first week and then keep costing you for the rest of your life.
The choice is to spend $4000 or to spend hugely more than $4000. If we had a real government, it would be structured so that we got something back for our largesse. But we don’t. So even that’s not possible.
The only thing anybody could ever do about this situation is not succumb to smooth-talking politicians telling people what they want to hear.
Good luck with that.
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