Of course things seem to always simpler a posteriori

For fifteen months, the Federal Reserve and US Treasury are trying to minimize the macroeconomic crisis consequences But they also had three other secondary objectives:

conserve as much business as possible under the control of the private sector;

prevent the Kings of Wall Street to take advantage of the systemic risks that they created.

ensure that the loss of small owners and savers is not too heavy to bear for their only "crime" of having agreed to take risks by borrowing.

It is clear that the Fed and Treasury have lost the game. To avoid a recession, other branches of the Government will now have to intervene with other tools and other powers.

The inability to stem the crisis is due to the excessive concern given to the Kings of Wall Street and the private sector. If the Fed and the Treasury had granted to these two objectives secondary importance that they deserved, the threat of a global recession would be well below.

The decision of the Fed and the Treasury to let Lehman Brothers sinking into bankruptcy uncontrolled without supervision or guarantees reflects this desire to prevent the Kings of Wall Street to take advantage of the crisis. The logic behind this decision was that the holders of shares had been already severely punished when their companies were considered too important to drop their balance sheets. The shareholders of Bear Stearns, AIG, Fannie Mae and Freddie Mac, which had simple positions in such companies, saw their economies sold for a few cents only.

However this was not the case of the holders of bonds and counterparties on the markets, which were paid in full. The Fed and Treasury have feared that the lesson of the second half of 2007 and the first half of 2008 was that the U.S. Government guaranteed all debts and each bank transactions and Bank-like entity deemed too important to file its balance sheet. For the Fed and the Treasury, this situation could be healthy.

Lenders to the highly leveraged institutions had to have some motivation to assess the risks. But this required, at a certain point, allow banks to fail and to persuade certain holders of debts and counterparties that the guarantee of support from the Government to the institutions too big to fail was uncertain.

In retrospect, it was a huge mistake. The extensive network of funding as there was in the summer of 2008 was the result of millions of calculations according to which the American Government in fact guaranteed debts without guarantee of each large Bank and Bank the country type entity. The collapse of Lehman Brothers having put an end to this, financial institutions have immediately sought to increase their margin of manoeuvre to avoid recourse to the Government, but realized that it was impossible. The bankruptcy of Lehman Brothers has created an extraordinary demand immediate additional banking capital, the private sector could provide.

It is at this time that the Treasury has committed his second error. In wanting to preserve the private nature of the economy, he sought to avoid the nationalization of the banking system components deemed too big to fail. With hindsight, it appears that the Treasury should identify all these entities and begin to acquire shares in that their likes it or not until what the crisis passes.

This is actually what might be called "lemon socialism" (the socialisation of losses, Editor's note), which leaves poses a threat of large-scale corruption and establishes a precedent for intervention that may be very dangerous after the account.

But this situation would have been worse than today The inability to sacrifice the secondary objective of preservation of the private sector suggests that the Fed and Treasury have missed the opportunity to reach their main objective: avoid recession.

Of course, things seem to always simpler a posteriori. To avoid recession, need to go through a Keynesian fiscal policy in the former: the Government should directly take control to stimulate spending and decide what goods and services will be requested.