Over the weekend, I went to Blogworld (yes, it was fun and I learned some things – thank you very much for asking). And in one of the sessions on financial blogs, there was some talk on the $700 billion bailout and the financial crisis. It was suggested that rather than $700 billion, and rather than the $1 trillion that some are predicting today, the total cost of the bailout to the economy will be something closer to the $2 to $3 trillion range.
But it might have been necessary.
Instead of focusing on the “bailout” aspect of the government action, one of the panelists (I think it was Paul Kedrosky) said that this isn’t a matter of “too big to fail.” Rather, he said that perhaps these Wall Street companies are “too mestastatized to fail.”
This is an interesting take that considers the following point: The investment banks and financial institutions that are being bailed out are more than just bankers and Wall Street investors. And their influence extends beyond bad mortgage backed securities and other ill-advised financial instruments. These financial institutions are involved in everything from pharma to cars to retail to commercial real estate to cash to anything else you can think of.
These firms are so pervasive throughout our country’s economy that more than just the financial sector could fail as they go down. Everything else could, too.
So the questions become these: Going forward, how much influence should such institutions have? And should we even have investment banks? And is it time to put back into place the line between commercial banks and savings and loans type institutions?
It appears that de-regulation has only resulted in a mess that has actually socialized risk, rather than leaving things up to the vagaries of the “free market.”
Also, watch this interesting video featuring Paul Krugman. (Hat tip for bringing it to my attention: Calculated Risk.)