Yes, and they won't try it again. Not only in the US, but elsewhere too, there is no appetite - by the public or by politicians - for the consequences of allowing failure.
Maybe there would be in a healthy economy - but this is a global crisis. Even China, with its immense reserves, can't fully deploy them, because globally it will only make things worse. The world can't afford the price if the US goes down.
The key here is that interventionist economics and fiat money recognizes only one remedy for this kind of crisis: injection of liquidity. Freeing up money.
If that means deficit spending and increases in debt, so be it. It's the only answer. Letting enterprises fail might be "correct" economics, but it won't solve the crisis. It will only make it worse.
First, the US and everyone else has to get through the crisis. Only then can the greater problems be addressed. If we don't get through the crisis, the globally it all falls apart anyway.
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It's pointless to speak as if the US would be OK if we just let the big ones fail. It was already heading straight for a brick wall.
The last time the US had a shot at controlling debt was around 2000...
Since then cessation of Pay As You Go and use of supplemental budgeting has layered additional trillions into debt. Tax reductions meant that money was borrowed to pay for increased expenditures. The US was borrowing, not paying, as it went.
After 2000, any idea that the US revenues would exceed expenditures became fiction; every year therafter, the fiction became greater.
After 2000 the US was never going to be able to sustain its course: it would spend and borrow more than it made. The result was predictable, and unsustainable:
stlouisfed.org
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But in this crisis there is no alternative: the US must borrow and spend more, if it follows the precepts of interventionist economics and fiat money. It must pump liquidity into the system, and it must prevent failures: there is no choice. The same is true in every other nation that has insufficient resources - and surprise - even nations like the Saudis and China must use their immense reserves very carefully - or they'll tip the world into economic meltdown.
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If the world gets through this crisis, and if the global economy stabilizes, then and only then can the consequences be dealt with.
But the US was already on an unsustainable course before this crisis. The US can change course and avoid a crash if there are drastic cutbacks in entitlements, if GDP grows strongly, if taxation increases. A US crash is not inevitable: there are remedies, and there is hope - some would say, "faint hope".
In the meantime, neither governments nor populations need more economic shocks. No more Lehmans. Keep everything going until the dust settles, then deal with the consequences.
Is that the right thing to do? Austrian school economics says "No!". Intuitively, it's wrong.
But intuition and Austrian school economics aren't running the show. Fiat money and interventionist have the stage.
Nobody knows how it will come out.
Jim
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