We've been a guns & bubble economy now since the 80's.
If you were Obama, Geithner, Bernanke, or anyone in a position to materially affect the financial system, markets, monetary system & face the collapse of the global economy on your watch, wouldn't you kick the can down the road, hoping to buy more time to sort things out in a more orderly way later? This is exactly what is unfolding.
As a Socialist, I see leveraged crazy-capitalism imploding - I don't see any alternative to re-inflating this bubble, trying to create additional bubbles as an offshoot (re-inflating assets, commodities & perhaps add alternative energy, as we haven't gone full-bore on that yet).
Sure, moving the insane liabilities off of company balance sheets onto leveraged government balance sheets is morally corrupt, anti-free market, (I don't know that I'd call it Socialism as government is not controlling the means of production or distribution -if you can call our financial system a product-, rather insolvent corporations are dictating our government's actions.. call it little-f fascism if you like.
PLEASE someone tell me what the alternative is to kicking the can down the road & creating another bubble?
Treasury reports Q4 2008 - $200 trillion in outstanding derivatives (4x WORLD GDP), 96%+ of it held by 5 US Banks, all basically insolvent TARP recipients. (98% of the derivatives are credit default swaps) http://www.occ.treas.gov/ftp/release/2009-34.htm
$200 trillion in CDS's alone, not to mention all other forms of leverage that are unwinding.
If you actually look at the US Government's books from a generational accounting perspective and include future off-balance sheet obligations of Social Security & Medicare, we're already on the hook for $60+ Trillion in debt:
Check out the Federal Reserve Bank of St. Louis white paper by Laurence Kotlikoff titled "Is the US Bankrupt?":
Weigh it for yourself if you're Geithner or Obama - what are the options? Certain implosion of the world economy on your own watch if we swallow our bitter pill now, likely implosion of the world economy down the road on someone else's watch?
When it comes to putting food on the table, whether you're a Democrat, Republican, Socialist, Capitalist, Libertarian, Free Market worshipper, you can't eat your ideals & you will find a way to justify bending them as far as need be.
Now we're using non-existant FDIC funds, plus a meager 7% from Treasury & 7% from the Fed to allow "private investors" to buy toxic assets with the PPIP plan. There is nothing to prevent banks from buying eachothers toxic assets at inflated prices & shifting 93% of the liability to the US Government. Banks have said they're looking into it & even Sheila Blair FDIC Chairman has said she's open to it. They will have done it before anyone can cry wolf.
Forget your ideals, forget what action the US Government SHOULD take or what YOU would do, or how sure you are that XYZ plan is doomed to fail eventually - what action will the US Government take? So far every step they have taken has been towards re-inflating bubbles through massive leverage and some damn creative accounting.
I don't see big banks going broke left and right - we're doing everything we can to create another bubble. We're betting the farm on it - we'll all go together when they go..
If you think the US is going to do anything different than what I've laid out, I am earnestly interested in your view and whatever data you may have to support it.