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Originally Posted by jyl
Do financial crises impact the so-called "real economy" of our daily lives? Why, and how?
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Flow of credit and velocity of money. If crises create inflation or deflation, then Main Street feels it. I am personally wrestling with the decision to start growing in real estate again or sit tight. Can I replenish funds (via credit) after going on a spending spree?
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When does a financial crisis merit govt intervention?
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I'm a laissez fair dumbass. However, I believe (and I could just be venting anger) govt intervention should be accompanied by some legislation or regulation. If these guys are too big to fail, then we should eliminate the big dogs. If leverage was the culprit, manage reserves better. I believe our ultimate undoing was an unusually long period of low interest rates due to mis-pricing of risk. There were too many dollars chasing too few quality investments.
The chief issue here shouldn't be how much it will cost, but rather, how can we prevent it from happening again. Rampant housing appreciation is a big factor in this crisis. As bad as it seems, we must be willing to target the mechanism(s) that permitted it. If we are prepared to act during the bust, we must be equally willing to act during the boom/bubble.
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What kind of intervention should we allow?
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Intervention which ensures the same players never get a second chance.