I’m irritated by this knee-jerk anti-bailout reaction (”$700bn to the fat cats!”). Check this diagram from the BBC (http://newsimg.bbc.co.uk/media/images/450620

I’m irritated by this knee-jerk anti-bailout reaction (”$700bn to the fat cats!”). Check this diagram from the BBC (http://newsimg.bbc.co.uk/media/images/45062000/gif/_45062415_wall_st_bail_plan_466_2.gif http://newsimg.bbc.co.uk/media/images/45062000/gif/_45062415...) There is no $700bn going into some Wall Street bankers pockets. First off, $450bn of this bailout money is conditional. Also, see that arrow pointing from the Banks to the Gov’t? That’s a stake in the banks being given to the taxpayers. So you’re not just losing money, you’re gaining an asset, and the chances are, at a very good price. There’s a chance the US Gov’t could end up making a profit out of the situation when the housing market recovers, which it inevitably will. This credit bust is definitely a mess, but this doesn’t mean there won’t be any credit in the future. We need to think 5-10 years into the future. Things will recover, they always do. The closest thing to this I’ve ever studied were the currency crises that happened in Asia in 1998 (indeed they were my savior in my final international economics exam). The big lesson I learned was that self-fulfilling prophecies can occur in the markets. If everyone loses faith in a currency, then it will crash, even if nothing has fundamentally changed. The same thing can happen with banks. If we think some are going to fail, sell its shares, then we can help make it fail. So to counter-act that you need some pretty aggressive action, and even if it isn’t perfect, people are misunderstanding that doing nothing could be much, much worse. If this credit problem is not solved and confidence restored, then it is easy for the effects to spill over to the main economy. The worst would be for otherwise healthy firms to stop receiving credit, be forced to lay people off in a downturn, add to unemployment, and then just make the whole macro condition worse for everyone. Credit plays a vital role in smoothing out consumption and investment cycles - so the banks that facilitate this and are otherwise healthy need to be backed up. That's started happening in the UK (http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3123736/Banks-turn-the-screw-on-businesses.html http://www.telegraph.co.uk/finance/financetopics/financialcr...). If unemployment rises sharply, then things will get really bad.