Wall Street Wails and Papa Paulson works The Nationalization of Banks: What A Crisis of Ethics!

The stock market has gone down dramatically this week, looking like it has taken a big upper cut from Mohammed Ali. The S&P 500 is down nearly 16.3% for the week.

The Fed, the Treasury, the BOE, the ECB, and just about every Central Bank has been pumping money into the system and performing every trick in the playbook. Unfortunately, it is a classic question of the tail wagging the dog. Instead of earnings and good governance impacting prices, the 'officials' want to play their tricks to move the stock prices up first. The latest move is to NATIONALIZE THE BANKS. Headline: US to buy stake in banks, first since Depression.
"The government will buy an ownership stake in a broad array of American banks for the first time since the Great Depression, Treasury Secretary Henry Paulson said late Friday, announcing the historic step after stock markets jolted still lower around the world despite all efforts to slow the selling stampede. No one seems to display any sense of ethical behavior."

It helps to repeat the root cause of the current problem.
Everything begins with income- either from a job, or from return on assets like rental income from properties, or retirement income from sources like Social Security. Any family has to first pay taxes on income, then satisfy its essential, non-discretionary needs like basic food, clothing and shelter. If any cash is left, then it can be used for discretionary purchases, or can be saved. When on'es income goes down, then items have to be cut first, and then non-discretionary items may have to go too.
WHen the Internet Excess/Bubble burst, millions of well-paying jobs were wiped out. This was followed by 9/11. Right afterwards, Mr. Bush exhorted the public 'to go out and spend.' Jobs lost---> incomes down---> got to keep the life style going -----> borrow and spend. While the borrow and spend strategy has worked for the government it does not work for the common chump on the street.
For borrow and spend strategy to work ---> folks willing to lend. WaMu, Chase, Lehman, Fannie, Freddie, and all the others were more than eager to lend ----> these firms made huge 'accounting profits' because rising asset values meant that their loans were 'safe' and folks would pay back their loans with their rising income, rising from growth in asset prices.
Asset prices, primarily that of houses, drop because fake demand can be built up only for so long, but real supply keeps cropping up like cockroaches ----> income from jobs not enough to meet non-discretionary needs and discretionary needs AND pay the interest on debt ----> defaults on debt rises ----> assest, in the case of secured debt, are repossessed -----> asset prices of remaining properties fall further ----> downward spiral accelerates.

A serious examination of the 'job recovery' after 2001 reveals that a large percentage, certainly > 50%, of the jobs came from housing related industries and finance related industries. Any economy based just on the 'finance industry' is suspect, as this episode has proven.

All the solutions pushed by the officials, Obama, McCain and the bunch, just put more money into the system, make the taxpayers take possession of assets, some of them worthless, and enrich the bankers and the stockholders. These solutions do not address the fundamental issues that should be talked about and the expectations that should be set.
Some of the basic ideas that should be followed include:
1. Living within one's means
2. Getting used to a lower standard of living
3. Getting a more rigorous, higher quality education
4. Forcing the government to spend more on education and infrastructure and much less on defense and highways to nowhere
5. Pushing back the culture where 'faith' blinds reason and logic.

If the government does not intervene and let the market forces work, the system will reach an equilibrium. Lousy institutions fail, people will stop gambling on Wall Street for a long time and focus on productive work, banks will eventually start lending based on good credit evaluation principles, and the system will be rebuilt on solid foundations.