Prevention is the best cure. Turning off the credit spigot in time would have been the most effective way to prevent the current financial meltdown. Government regulators being asleep at the wheel allowed financial institutions to gorge on easily available credit and load up on toxic mortgage debt. This served as spring board for the perfect storm.
The Financial Select Sector SPDRs (XLF) and other financial ETFs have lost over half their value since their 2007 highs. Some company’s share prices have plummeted by more than 99% while others simply ceased to exist. Survival of the fittest is the current theme of the financial world.
With big fanfare the government, Treasury Secretary and SEC announced a wholesale solution to the problem; A $700 billion bailout, which might actually cost closer to a trillion. The bailout idea was flawed from the beginning. Why would you throw $700 billion of good cash after a crumbling sector? Would it make sense to shore up a sector like consumer staples? No doubt, companies like McDonalds and Proctor & Gamble could use a boost.
In theory, the $700 billion package was supposed to increase liquidity. This makes sense in a theoretic world but what about reality? Japan has given us a window into reality. None of their government’s stimulus package has lifted Japan’s economy out of the recession. Banks are hoarding their money because they know they’ll need it. Why should it be different in the U.S.?