When asked, for example, what I "do" with clients in therapy (the age old what is your theoretical approach question), my wise guy answer is: "As little as possible." An alternative answer could be, "Just as much as is necessary and not a bit more."
You want to activate the internal healing resources of the system without contaminating them. This recovery has to be about the banks and the markets, not the government. This is a tough sell in an election cycle of course. Nevertheless, the parts of the system must attribute it's recovery to itself in order for robust healing to occur.
So you want just the right amount of bailout targeted only where it is needed. The question of "How much?" and "Where?" I will leave to others who know more than I. It seems that the plan that our congress failed to agree upon over the past couple of days does try to strike this balance, with the money being dolled out in three parts, over time, with oversight and market responsibility. It would have been a little "clunkier" than I would have liked, but it's congress after all.
Bush is not the only bad father figure in our government. Like a mother and father embroiled in constant conflict over a needy child, our congress is about as dysfunctional as you can get at instilling confidence from their constituents. We are often left with that yucky feeling of the mom blaming the dad while they continually ask us who we want to live with once the divorce is final. But once they get the deal passed, and they move on to blaming each other for the mess for the next several months ("You know it was your mother who wanted that bailout, I was really against it the whole time!"), the next step will be reforming the regulations.
I'll chime in there too, even though it's way outside my scope of expertise, using very general terms informed by a complex adaptive systems perspective [see http://www.societyforchaostheory.org]. The free market ideology is flawed because it is based on the assumption of a mechanistic or closed system. Many models of the economy I understand are still based on the antiquated idea of homeostasis as well, that there is some set point that the market tries to correct itself toward. The model describes the markets like a thermostat making corrections when things get too hot or too cold.
In actuality, free markets are wildly complex and interdependent systems, operating at times far-from-equilibrium, and displaying order not through homeostasis, but through processes such as emergence, and self-organization (where parts emerge into wholes which go on to regulate parts). Market systems evolve over time and may tune their complexity-order balance to manage internal and external demands. And if they become too wild, they can tip into high degree chaos, becoming disintegrated. If they become too rigid, as was the case in the current crisis, they can suffer a catastrophe. They can collapse under the weight of their own debt: "cannibalizing themselves," as profit and borrowing do an increasingly quick ball-room dance with one another. Eventually, the dance falls apart at the seams. Whether it is through the route of chaos or catastrophe, the results are potentially devastating when the scale of the dance is so large.
If you had a very small and simple system, a closed in theory, say a small market square with a fixed number of vendors, where no one came in or out, and everyone relied on everyone else for a variety of good and services, then let the free market evolve without restriction. But of course this is a false construction, a fantasy. Even if such a market existed, you would need regulation to keep the gun shop owner from turning rogue and taking over the flower shop. Even in tribal economies one would occasionally encounter wars, over-specialization, and slave-trades.
The modern world is comprised of highly open, interconnected systems, and the scale is now global - it has grown up to that level. These systems are interconnected across various types of systems and across scales of size, as the politicians say: from Wall Street to Main Street.
The scales these days are truly global. If such systems are left to run themselves, the incentives will always turn toward short-term profit and consolidation of power. I heard His Holliness the Dalai Lama respond to a question about the morality of big business. He responded essentially that in capitalist systems the distribution of wealth may not be so good, but the products are very good (I think he pointed to his Nike Sneakers at that point). In communist systems, the equity of wealth may be good, but the products are not so good. His solution was to market the idea of long-term profit. His only quibble with the free market was its focus on short-term gains. This, in his opinion, is where all the "evil" comes from.
Who am I to disagree with His Holiness. The more power consolidates, at the largest scales, the more this power can be leveraged to create artificially huge short term gains. Big scales of size lead can lead to short scales of time. Again, as Bill Clinton describes: "...crazy binges of sub-sub-prime mortgages or derivatives because people now recognize all over again what they had to learn in the depression and two or three times since, that markets that are left unaccountable, at the margins, will self destruct, they will cannibalize themselves." When the largest banks spread over the borders to become both traditional and also investment banks, the scales are tipped toward "bigness." At the same time, when a lack of regulation allows these banks to run on empty, with 30 dollars being leveraged for every 1 dollar held, and when these 30 dollars are borrowed from other empty banks, you have a system cannibalizing itself. And the waste-product produced after this destructive Wall Street banquet is plopped right down on "main street." I'm looking off my back porch at 3 bank owned condos in a row right now. Seriously. This is the big stinking crap of Wall Street, no?
Every system that shifts rigid needs to export its waste, its entropy, to some neighboring system. For a good read on this Nobel Prize winning concept, Nicolis Prigogine's work on chemical systems is a good read. A system can violate the second law of thermodynamics (order tends toward disorder) locally, with order emerging from relative chaos, so long as that system discharges a greater amount of entropy to neighboring systems.
Do all of us as the taxpayers need a giant pooper scooper? "Yes." This is what the bailout plan is, a giant pooper scooper. And maybe the detritus of the bad mortgage debts can be used to fertilize some gardens here and there. Who knows? We can hope. But we should only scoop up as much as the system needs to survive. This hangover needs to hurt for reform to come. And the reforms, whatever they are, should focus on confidence. Hope is not the same as confidence. Otherwise, Obama would be farther ahead in the polls, no?
What makes the market truly robust?
1) Diversity. Power-consolidation needs to be limited to keep the balance that true competition adds to the free market. We used to know that monopolies were bad. What happened there? Keeping some financial industries small enough keeps the scale of power from growing too large. The experts will need to define the terms and boundaries here. The main issue is not to let any single fish get too big for a single pond. Big is fine. But too big for the pond and you risk collapse when that fish starts eating its own tail. Systems with many agents are capable of re-emergence and growth. Those that are too top heavy risk collapse. Again the experts will have to determine the boundaries of each ponds (i.e., traditional versus investment bank, insurance company versus hedge fund, mortage debt versus derivative), and how big is big.
2) Long-term gain. Any regulations that facilitate long-term growth over short term risk are good. What is long and what is short, again I will leave to someone who knows what they are talking about, not me.
