For me, the key to the future is the action to be taken by the Federal Government to reduce the size of the toxic assets on the books of U.S. private financial firms.

Since no one knows the current size of the problem, no one knows to what degree the market is resolving the problem by actors selling positions to each other.

The infusion of more than 300 billion dollars from the public sector to the private sector should have strengthened the banks.

My conclusion to all this uncertainty is that now is the time to withdraw the public money and let the market determine which banks are currently strong enough to stand on their own (including AIG).

your solution of fixing the problem with temporary medicine won’t solve the patients problems. In order to solve his problems he’ll need to go “cold turkey”. If he doesn’t go “Cold Turkey” and continues getting temporary medicine it could end in a fatal situation (Default on debt).

Throughout history, Austrian economics provides a guide to market rule. In my opinion nothing can avoid a U.S. Depression, or worse yet Stag-Depression.

I’m sorry. You can kindly play Russian roulette with someone else’s life savings.

The thing to do is just regulate the hell out of the critical infrastructure so that any company is either too small to have a serious consequence if it fails, or is big enough so that it is quasi-nationalized and heavily regulated.

Also if people think that a firm is too large to fail, then you’ve already lost the game.

LostDecade: Twofish does not understand the patient has cancer, bandaid here, bandaid there.

So what do you suggest?

The first thing that any doctor learns and any economist should learn is “noli nocere.” Do nothing that makes the situation worse.

LostDecade: The U.S. is Japan but in much worse shape than Japan because we have a deficit spinning out of control.

That’s not true. The US has a debt / GDP of about 70%, Europe is about 80%, and Japan has a debt / GDP of about 160%.

The important thing about debt / GDP is to make sure that you spend your debt on things that will increase GDP. If you do that, then you can worry less about debt since GDP will grow. If all that money that had been plowed into houses and Iraq had gone into something like teacher salaries and nursing scholarships, we’d be a lot better off than we are right now.

The trouble is that when the incompetent implode they take the competent with them. Look at the 670,000 that got unemployed this month. How many of them really had anything to do with subprime mortgages?

If you are at a bank that did things wrong now you are looking at 60% layoffs. If you are a bank that did things right, you are looking at about 15% layoffs. The fact that you did everything you did right, is pretty cold comfort if you happen to be in that 15%.

In any case, we are pretty much done with the implosion phase for now.

And the banks were weak because the government refused to either let them go under or pump more cash into them. So as a result, the banks started “evergreening” loans, which is a bad thing. One other thing that people almost never mention is that a lot of the problems of the Japanese banking system started in the mid-1980’s when the government deregulated the banking industry in a big way.

Also, it’s unwise to just take one similarity and have this be the only main point. There are about fifty differences between Japan and the United States and fifty similarities, and it’s sometimes tough to figure out what the important differences are.

ReformerRay: Twofish wants the U.S. to repeat the mistake made by Japan.

Actually no, but we really don’t agree on what the “mistake” or “mistakes” were. The big mistake that I see is that the Japanese government didn’t inject enough capital early or quickly enough to prevent a deflationary spiral.

MRein has already done part of that. The $20 billion that GS had in AIG CDS. You then look at the firms that do business with Goldman to access the commericial paper markets.

ReformerRay: If he could do that, which he cannot, we would learn that the influence of the failure of AIG on the third and fourth order firms would be minimal because so many of those firms are dependent on firms othr than AIG.

Not in a systemic crash

A->B – you are dead

A->C->B – you are also dead

A->C->D->B – you are also dead.

The US only has four megabanks and had six investment banks and maybe about a two dozen primary broker dealers before this crash. Also there was Freddie and Fannie which was another point of failure.

ReformerRay: The complexity of the dependencies argues against any one firm being too big to fail.

If it was a distributed net, maybe, but it isn’t. It’s a hub and spoke model. Things even into a hub and spoke because under normal conditions, it turns out to be more efficient.