What happens if we let Mr. Market handle the problem all by himself?
At this point, credit markets are largely frozen in place, waiting on Congress to excrete or get off the pot. Financial institutions are extremely reluctant to lend any money to each other, even overnight, for fear of trading with someone who will declare bankruptcy tomorrow.
That means the normal ebb and flow of ordinary commerce around the world is severely impacted. Every day we wait is forgone economic activity that will never come back, and over time that will make the economy smaller than it would have been. That means job losses and smaller retirement savings accounts.
Now what if Congress pulls the plug and adjourns without doing anything?
The credit crunch will then resolve itself with a large wave of bankruptcies by banks and financial firms, large and small, around the world. This will most likely happen with breathtaking speed, far faster than any similar financial re-alignment in history. The Fannie/Freddie/Lehman/AIG/WaMu failures will be the tip of the iceberg.
Now, lost in this maelstrom will be a great many financial institutions that are basically solvent and could hold on otherwise. There will be a lot of wreckage out there, and a lot of damage to stock-market and commodities prices, which in turn will hurt the retirement savings of ordinary people.
Where will it end? That’s a good question. My guess is that it will work like a defibrillator applied to a stopped heart. It will take months to sort out, but new credit structures will arise quickly to replace the old ones.
And the Federal Reserve will step in to provide the additional liquidity needed to get over the hump. They may take steps like reducing interest rates to zero, and opening their discount window facilities even wider.
And significant co-operation will be required with foreign central banks, because this will be a global problem.
This sounds bad, and it is. On the other hand, it's the steady wit and wisdom of North Carolina Libertarian candidate for Governor Dr Michael Munger that keeps things in perspective:
The situation is bad, but not so bad that a bunch of panicked politicians can’t make it worse.
Think of it this way: we invaded Iraq in 2003, and we've been repenting that decision ever since, to the cost of about $583 Billion to date.
Now, we're seriously contemplating allowing the same Presidential administration, dozens of the same Senators, and hundreds of the same Congressmen who thought that was a good idea at the time to commit to spending what might be TWICE THAT MUCH in a single week.
Even I--Libertarian that I am--have to ask the common-sense question: Assuming that the sell-out is inevitable, why are we bailing out the banks and not the people who stand to lose their homes?
And you wonder why we Libertarians don't trust the government.