There seems to be some common misunderstanding out there. What we are facing is not a liquidity crisis. In this instance a financial institution is solvent and above water. The long-run value of their assets is greater than the long-run value of their liabilities. They just, for whatever reason, have a sudden need for cash and cannot raise it quickly or without taking a bath in selling their assets at fire sale prices. Well, we are not here. The Federal Reserve has opened up their lending facilities and created many more to get financial institutions what they need. No, the problem we are facing is much more severe. We are in a financial institution solvency crisis. That is, many financial institutions are insolvent so that when you make them put a value on what they have and what they owe, their assets are less in value than their liabilities. Let me say it as plainly as I can. Many financial institutions are bankrupt. Note the first four letters in the word bankrupt. That is why the government has now stepped in to "recapitalize banks." Said differently, buy up some of their stock to inject working capital, new money, into the firm and refloat it above water. When Citicorp was under water, they called Dubai and traded stock for $7 billion in new capital injections. Same deal here now with the U.S. government. So think of Hank Paulson in the same way, just without the harem and belly dancers..... http://www.youtube.com/watch?v=9ut8CQdbaIA&feature=related
If we could avoid a major economic downturn with these banking measures, the funny economist would do a dance like that too. Then again, maybe it would be better to take the hit and have the downturn.