Many folks are in a panic. They're losing confidence in their banks. They worry what'll happen to their savings. Their retirement accounts are shrinking. It's like the sky is falling...
The Fed understands this crisis which stemmed from institutions' overexposure to the risky subprime mortgage market. Many banks have already failed and taken over by the FDIC. A few months ago the government engineered a sale of troubled Bear Stearns to JPMorgan Chase. A few weeks ago Fannie Mae and Freddie Mac were seized by the government. Was Lehman Brothers betting on a bailout? No bank would pick up Lehman without the backing of the government, and Treasury Secretary Henry Paulson wasn't keen on another bailout. In the end Lehman was left without a suitor and had no option but to file for bankruptcy, ending its 158-year history and making history as the largest bankruptcy ever.
Credit is due to Secretary Paulson for allowing capitalism to work. In order for capitalism to remain healthy, sometimes it must go through illnesses, just like a human. Now that he has shown the market that he's not always Uncle Sugar, many banks have pooled together cash to improve lending, instead of always relying on the Fed.
What will happen to AIG and other troubled institutions in the future? Nobody knows, but capitalism is also about owning up to the decisions you make, good or bad, and living the consequences.
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