Most speculative bubbles produce something everyone wants to own that is way out of proportion. Housing was overproduced. This was an extreme misallocation of resources. The problem, the economy can't shift it's focus of production overnight. A second bubble was loaning money to anyone who wanted to buy a house or car. Label this one a misallocation of financial resources.
Now the country has several problems. There is a surplus of homes for sale and a very large amount of failed bank loans that are uncollectable. Each home seller got real cash for the home. The new owner borrowed funds from the bank. Now, most of the major banks are bankrupt and the government is bailing them out.
The US had over 17 trillion dollars worth of savings. The banks probably loaned out 7 trillion that will never be paid back. Someone got that money and saved it or spent it (consider it spent and gone). Now the government wants to borrow 4 trillion dollars (two years worth of taxes) to bail out the system. Add the up the bill, 7 + 4 equals 11 trillion dollars worth of IOU’s.
The FDIC insurance stops people from making a run on the banks. Their money is safe. They have peace of mind. Normally a run on the bank would force liquidation of home loans. This has been accomplished without a run on the bank, the homeowners took a walk.
There is a problem with retirement funds. As long as money coming in, is greater than that going out, the game can continue. What people save on their taxes by contributing to these funds keeps the game in play. Retirement funds and mutual funds look extremely suspicious right now. It seems quite likely that these unregulated institutions should have a good share of bankruptcies, more so than the banks. Bernie Madoff cleaned a plow or two!
It appears likely that between 5 to 15 trillion dollars has been spent on fast cars, homes, and all sorts of toys. Those with money spent it, those who had none, borrowed it.
Congress is going to try and get the economy going by borrowing and spending 4 trillion dollars? Just who is stupid enough to loan the government that amount of money at these pathetic rates? Question two, what if there isn’t 4 trillion dollars available to borrow? Interest rates will have to increase drastically.
Now we have a lot of people being laid off. These people are going to dip into their savings and then into their credit cards. The solution for Joe Sixpack and government is the same “Spend what you don’t have in the hopes that things will get better.” The rational behind the concept is “You have nothing to lose!” This has Barnum and Bailey written all over it, a real circus act!