Large Scale Federal Intervention On the Way?

As I am typing the chairman of the Federal Reserve, the Secretary of the Treasury, and the bi-partisan leadership from both houses of Congress are preparing for an historic (and emergency) meeting in Washington. The meeting appears to be for the purpose of hammering out some sort of plan for a large scale Federal Government intervention aimed at stabilizing the crisis now gripping the nations financial markets.

Details are all but nonexistent at the moment and likely will change during the course of the meeting anyways. But the very general thrust seems to be in favor of creating some sort of Federal Gov't entity that would relieve Wall Street banks of the mountains of bad debt that have accumulated, mostly from sub-prime mortgages. This debt is crushing the banks and depriving them of the ability to issue credit. Which in turn is having wide spread effects on the rest of the economy both here and around the world.

Lets not kid ourselves here. We are in the midst of the most serious financial crisis since at least the crash that precipitated the Great Depression. We can't keep rescuing some banks and letting others succumb (though in truth they deserve to). Twice in the last year the Feds have almost certainly prevented a for real no joke full blown stock market crash. The first time was with their emergency rate cut of .75% and the second was two days ago when the U. S. Government effectively nationalized AIG less than 12 hrs before it would have gone under. In the absense of those interventions I (and most analysts that I have read) believe we would have seen losses of between 1000 and 2000 points on the DOW in a single day.

The danger is not over.

This is where Ben Bernanke and Henry Paulson earn their salaries. We are living in historic times. A hundred years from now economics students will study the Panic of '08. The question is will they study it as an example of how to deal with and tame a panic in the financial markets like J. P. Morgan's intervention that arrested the panic of 1907? Or will they view it the way we look back on the build up that ultimately lead to the crash of 1929?

History is being written even as we all type. I find that a rather humbling thought.