You are right. In socialistic countries, the government becomes the bank. As in Argentina. And then you really have trouble. There can be no end of printing money by political edict. Bailing out banks is quintessentially big non laissez faire government. It is the next step to owning them. The question on most people's minds and it has not yet been demonstrated to have a clear mechanism, is that just getting us into more trouble?
What would really happen if Solomon and Lehman were allowed to fail? What you have to remember is those institutions that they shored up were the ones who sold all the government bonds, in other words created the government money. When the government sells bonds, to raise capital for itself, the bond houses issue a cheque. The government takes that cheque and puts it on deposit in the banks that bought the bonds. Voila! Instant assets and capital on which to make new loans! It's like magic. Then they turn around and sell the bonds to other people. More money. It just never stops.
Some people think money should be a politically controlled issue. It practically is, given the the government appoints the chairman of the Fed. But every country that has been given to printing their own money by political whim of a legislature, has developed into massive inflation problems. With the example and exception of the German governments under the Wiemar regime and under the Nazi regime. Some say the Nazi's and Schact defeated inflation by stopping the payment of overseas debt and ending currency speculation. But there was much more too it than that. They stopped printing excess cash as well. Fundamentally the value of the currency had to grow.
Economically the gold standard was brought about to control the settling of trade debts and devaluation of currency so that trading nations who dropped their unitary values could gain unfair trade advantage. Devaluation and inflation becomes desirable when governments have debt. That is Ben Bernake's helicopter. but as every money printed knows, interest rates have to rise to prevent further money growth, and that is where it can get savage. We saw double digit interest rates in the 1980's in an efforts to stave off the inflation cause by war and high oil prices. This caused further economic hardship (and further wage demands) which was exacerbated by the diminishing corporate surplus with which to expand, pay wages, and increase sales by price cuts. The cash crunch had begun. Relative wealth in the North America began to shrink although prices and salaries rose. Disposable income was beginning to be a thing of the past.
Disposable income has been disposed of again because of a massive fall in the basic debt economy since 2008. But here we have ultra low interest rates in the interest of spurring the economy. Deflationary pressures seem to loom despite near zero effective rates. The thing keeping prices from leaping ahead is the low demand, caused by lack of disposable income and economic uncertainty. People are afraid to spend cash on risk, or goods. They have damned little to lard out as well. Going to cash conserves the value of it, and we have been hearing this from people all over. It is the economic equivalent of hoarding canned goods for an disaster. But the labels on the cans get stale after while. Money loses value if it does not work. It is a bad strategy for an economic recovery for people not to spend money. This makes me think the contraction that is going on now in the economy, (which seems to be offset by some interpretation of some signs of activity, such as jobs etc. and not total market collapse), is actually going to persist for a while.
We have a situation economically today where there has been unprecedented money supply growth. No matter the losses more money is just thrown at the problem. Yet inflation has not risen significantly. We might term this non inflationary growth. We saw (semi) non-inflationary growth during the nineties. The inflation was 'hidden' under increased stock prices but not consumer goods prices inflation. You can also have stagflation, where there is inflation but no economic growth. (1970's has been labeled that way) Stagflation is thought to be a result of industrial undercapacity (This would not be Asia) and lack of raw materials. (oil). Scarcity cause penury and price rise simultaneously. This argues the monetary oxygen alone is not what a economic patient needs. Supply does not always react to demand.
What we have today is inflation of the money supply, non inflation of prices, and economic stagnation. I guess it can all happen together, as it has.
Keynes wrote this:
"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some." [...]
"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
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