"The story so far is that the US Government will spend up to $2 trillion saving this citadel - Wall St. Would it not have been better to spend that amount on public housing rather than merchant bankers?"

Er no. At least, not at the moment. The problem is that there's a housing oversupply in the US. And while in hindsight that might appeal as a notion, it does nothing for the current situation.

At least you've hit on one thing which is right:

"This is because if the banks won’t lend to each other, except at exorbitant rates, (rates which will flow through the economy,) why will they lend to us?"

Capital has to flow, and it has to flow around the world. The world has a combined economy now and at the macro level, it's all interconnected, so that in itself is the reason why something has to be done. Otherwise, as you say, the consumer will be forced to stump up for the money, and I personally don't want to be paying 80 or 90% interest (hypothetically) to provide the capital.

On a tangent for a moment: one of the commentators this morning mentioned that when there is a big dip in the sharemarket in the US, the capital gains tax (or equivelent) drops significantly. If the bailout occurs as proposed then it will be tax level neutral to the US government. I don't know how accurate that is, however if it allows the free-flow of capital to commence again, then that seems like the best $0 that they'll spend!

“Estimates are that banks and other financers have written off about $300 billion so far. While not insignificant this capital destruction is not major on a global scale.”

And what happens when “confidence” returns to the market?…

stocks go up and the $300 billion reappears on balance sheets and everything is fine again.

"Even more directly productive companies (like General Motors) which also have major finance businesses will be under pressure."

General Motors have been in the pooh for decades, cannot come to terms with building small cars, according to a colleague of mine, who worked for them in USA many years ago.

One of their biggest problems are the negotiated retirement packages they have for their ex-workers, which costs GM several billion dollars a year to maintain.

But in the end, the nature of the US economy will prevail.

I recall it was the Russians who collapsed when they realized they could not afford to finance a defense system capable of countering the (Capitalist) Ronald Reagan and his Star Wars project.

“As the spectre of wages cuts and unemployment haunts the working class, I think it is clear we are a long way from the end of the crisis.”

This crisis, that crisis, the flexability of the capitalist system is to be able to respond to change and adapt to any number of crises.

The problem with the (largely defunct) "centrally managed" economies, is their inherent central control, inflexibility and vested interests ensures that

instead of bending to handle the winds of change, they break.

Just ask any Moldovian

AIG, Fannie Mae, Freddie Mac total $300 bn.

The bail out proposal is $700 bn.

That makes $ 1 trillion. Double it and you might get close to the amount. (My public service experience has taught me the double up rule.) Professor Sachs estimates the cost as up to two trillion.

BN, when you say there is an oversupply of housing, do you mean housing stock, or for sale? Marx thought that the problem with capitalism was overproduction. Housing "overproduction" occurs becuase many Americans can't afford decent housing.

In saying that the $2 trillion would have been better spent on public housing I was making the point that capitalism has the wrong priorities - merchant bankers rather than poor Americans.

Col Rouge, I am not sure what the point is you are making about Moldavia. I do not support Stalinism, and in my article nowhere do I argue that.

In terms of the way capitalism works, periodic crisis are endemic. If allowed to work their way through, they can (like war too) cleanse the system, and the whole roller coaster ride can begin again, but from a lower base. Eventually the batteries run out and the system flatlines. (I note the head of ANZ today said if the bail out did not go through the US would go into depression. This is more apocalyptic than my article.)

The bail out prevents that "cleansing".

As to the destruction of value, I am not sure how the worthless assets in Lehman Brothers are going to revive. It's like thinking you have a Picasso and finding you paid $100 m for your daughter's kindergarten painting. The value doesn't suddenly re-appear.

In the case of capitalism those who survive get the benefit of the collapse in value by buying up assets cheaply. But on Wall St, nobody could do that or risk it. The US State is doing it instead, but it may take years (on a best case scenario) for these essentially worthless assets (rights to mortgages) to revive. Worst case? The assets (bad loans and all the derivatives attached) are irredeemably worthless.

The total housing loans in the US is currently $1.3 trillion. Bernanke's bailout (folly) is proposed to be $700 billion or 5% of the total loans.

Subprime loans were never more than 15% of the total loans. However the next level up were Prime Loans called Alt-A and the minimum requirements to qualify for those were no assets, no income but a credit rating.

The impact of these Alt-A starting to fall over were what bought down Lehmans and are threatening the other financial institutions and the economy.

Nobody knows the extent of the default on these loans but they account for 40% of the home loans market.

It is possible 55% of all loans are at risk of default. Eleven times Bernanke's estimation.

In the US a mortgage is not like in Australia. Any liability is limited to the home and does not extent to other assets. Default merely results in the return of the keys.

The consequence of falling prices and inability OR deliberate failure to met commitments is not so great. What we are seeing now is people who think it pointless to pay for an asset that has depreciated so much it would be unlikely to ever recover, in their life time, to cover their total repayment so they are simply and 'logically' walking away.

I doubt the proposed solution will pass The Congress in it's current form and even if it does and is put in place Monday everyone will wake up on Tuesday and soon come to the realisation that very little has changed. Mistrust will then reign supreme.

John (Passy),

"BN, when you say there is an oversupply of housing, do you mean housing stock, or for sale?"

Both. House prices are falling because there is too much stock and also because there are more houses on the market than there are buyers. The statistics on this are more than abundant, for example:

http://www.realestateconsulting.com/Intelligence.aspx?quicklaunch=true&region=us

Where the statistic states that the Months Supply of Unsold Homes is 11.2, near the all time high, and it's increasing.

"In saying that the $2 trillion would have been better spent on public housing I was making the point that capitalism has the wrong priorities - merchant bankers rather than poor Americans."

And where do you think the poor Americans get their money for their purchase of the 'American dream'? From bankers of course! And for the record, where did you get the money for your house? From a bank? Hypocrite!

Again Passy your statements fail basic common sense! Plus blaming capitalism as a concept is like saying it's a birds fault that it's raining because both inhabit the sky. It's a logical fallacy and is a repetition of your overused anti-capitalist rants.

"The bail out prevents that "cleansing"."

So Passy, are you advocating the grinding-to-a-halt of the worldwide financial system? What effect do you think that will have on the average Joe in the street? Are you taking into account the effects on existing borrowers in each country that will be affected by that? For someone who goes on and on about social equality etc that seems to be an entirely hypocritical stance to be taking.

Thanks BN.

I am not advocating economic cleansing, merely pointing out the consequences under capitalism of failing to allow it to follow its logical course.

To point out the failings of capitalism is not to agree with or relish the consequences. If I wrote a history of the Depression that wouldn't mean I supported its destruction of jobs and the prolonged misery it created, a misery only ended by war.

One can comment and analyse without agreeing with the consequences. In any event I don't see how the bailout will work. It doesn't address the low general rate of profit.

If that makes me hypocritical, as you call me, (the abuse starts once again, unfortunately) so be it.

I am buying my own home. I borrowed from a bank. The money the bank provides comes from the labour of workers in the productive sector.

So, BN, should we all bow to the banks and be grateful to them for making profit by transferring the surplus value workers create to others? This is trickle down theory, BN, and it doesn't work.

If there is an oversupply of housing in the US why don't they as a society enable the poor and homeless to take the unused houses over? The profit system stands in the way of the rational distribution of resources.

Increased living standards in the US will come about not by riding the coattails of capital but by fighting for better wages and conditions through strikes and so forth.

What caused this crisis BN? Was it greed, a few bad apples? They must be the great grandchildren of 1929 and the great great grandchildren of 1890. Maybe, just maybe, there is something more fundamental at work here and the problem is systemic.

The last few weeks have rocked the ideologues of capital, especially its neo-liberal variety. We might see Keynesianism make a return. It too won't be able to address the tendency of the rate of profit to fall.

Capitalism is a system of exploitation; crisis is built into it. We may be entering a new period of deep crisis.