[aet]

Letting Banks fail is what the Fed did during the Great Depression. See http://www.stlouisfed.org/great-depression/qa.html.

"Many people criticized the Fed for its response to the Great Depression. How is the Fed's response to the current crisis different?"

"The key difference between the 1930s and today is how the Fed has reacted to the crisis. In the ‘30s, the Fed more or less let the banking system collapse, allowed the money supply to collapse and allowed the price level to fall."

[ergoproxy]

I'd hardly call the Fed's response to the current crisis a success-- The U6 unemployment rate for the US is currently 12.6%; when we add back housing, healthcare, food, fuel, and education into the inflation statistics, its been running at 8-9%; and the Income Gini coefficient in the US is about 0.477. Meanwhile, the TBTF banks are even bigger, and the Fed's own balance sheet is a disaster waiting to happen.

[aet]

Yes - you're right, it isn't a pretty picture. That being said, can you imagine the outcome of letting major institutions fail? It is likely things would be much worse. Otherwise healthy institutions may have been brought down in the process.

[ergoproxy]

Letting the banks fail doesn't entail doing nothing and letting people suffer. Hank Paulson's bank bailout proposal got rammed through Congress by the Bush Administration without much consideration of any alternatives. Paulson's plan helped banks and bankers at the expense of everybody else. There were lots of other proposals that got ignored by the press. Here's three different approaches. While I personally favor the third approach, I think its very important to dispel the idea that we didn't have any choice but to bailout the banks, so I want to illustrate a variety of approaches:

(1) Steve Keen suggested a debt Jubilee: "monetary injections by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the public--but on condition that its first function must be to pay debts down. This would reduce debt directly, but not advantage debtors over savers, and would reduce the profitability of the financial sector while not affecting its solvency" quoted from http://www.debtdeflation.com/blogs/2012/07/22/the-crisis-in-...

(2) Mortgage assistance: put a moratorium on foreclosures; freeze rate hikes in adjustable rate mortgages; help homeowners refinance their mortgages; or replace home borrowing with renting.

(3) Ron Paul proposed we abolish the Fed. While the Fed's profits belong to the federal government, the Fed itself is owned by the nationally chartered banks. Therefore, it's power to create money is used to benefit the banks, not the government or "we the people." Take that power away from the banks and put it back in the federal government, where the US Constitution says it belongs. This has many immediate advantages. Here three: (i) The federal government can tear-up the $1.6T of debt on the books of the Fed. (ii) The federal government no longer needs to borrow money. (iii) Eliminate the asset bubbles created by the Fed's artificially low interest rates and quantitative easing. See http://theeconomiccollapseblog.com/archives/14-reasons-why-w...