I've been asked to summarize my opinions on the economic crisis. Most of what is here is buried in this thread, indeed this post is mainly an edit of some of the most important (to my mind) of those comments into a summary here, with some new material. I apologize in advance for the length.
First, coming up with an accurate narrative on how we got into this mess will be difficult, not because everyone is wrong about what caused it, but because nearly everyone is right. That is, most of the suggestions for contributing causes are true, and most of the attempts to dismiss contributing causes proposed by others are not valid. To pick on just one example, it is definitely true that pressure from the Clinton administration on Fannie Mae and Freddie Mac to buy sub prime loans to mostly poor mostly minorities was a contributing cause. But it hardly stops there, and indeed even if we took that out of the picture entirely it is not clear that the crisis would not have arisen nonetheless. I honestly don't want to even get into the clash of narratives - again, not so much because everyone is wrong as because everyone is right, and life is too short for that kind of flame war.
Second, it is a certainty that a credit freeze would be a disaster in the short and medium term, to a degree that many people simply do not appreciate at all. I can't predict exactly what form the disaster will take, nor precisely how bad it will be, any more than I can predict exactly how the train cars will end up in a major train wreck. But I know it is very bad and should be stopped. It is every bit as important as any critical national security or natural disaster concern. I should mention that there is even a small possibility that the credit markets will clear up without intervention. There is not complete certainty about the nature and extent of the threat. On the other hand, this is not war, and I happen to have regular dealings with some of the (metaphorical) weapons inspectors in this case. It's really bad, and people ought to accept that it is really bad, and that it isn't just about those guys over there but is going to be bad for you and your neighbors. The populist nonsense about 'each house being robbed of thousands of dollars to bail out Wall Street' is just poppycock: this is about saving your own bacon as much as anyone else's, and it isn't going to cost you thousands to do it.
I completely understand Main Street cynicism on the point. A perfectly justified cynicism combined with a genuine clear and present danger is a toxic combination.
Third, in the short and medium term, a credit injection by the feds has a very good chance - though it is by no means an absolute certainty - of averting the disaster. It even has a reasonable chance, managed well, of being profitable; because the illiquid securities causing the problem are very likely already written down, in aggregate, to below their hold-to-maturity value -- assuming no Depression II. Nobody knows for sure, but the case for it is quite reasonable. And if it is ultimately profitable, it does not represent a net addition to the national debt but a net subtraction from it.
Folks have asked why corporations flush with "cash" - that is, non-volatile liquid assets, since that is what the "cash and equivalents" line on corporate balance sheets means - do not do this themselves, especially if it actually has the potential for profit. Built into the question is a misunderstanding of the nature of the problem. The key problem with these securities is that they have been treated as non-volatile liquid assets, and have been held by many institutions as that kind of asset serving that kind of purpose; but now, with all the defaults/etc, they have been simultaneously de-valued and have become illiquid. They have become (or really always were) something entirely different from the function they have been performing in the financial system. Someone who buys them up can get a good deal on them right now as a long term investment, but he can't use them as a "cash equivalent". So when the federales come in and essentially trade them for T-bills (with an intermediary cash transaction), the feds are taking a valuable asset which is inappropriate to its present place in the machine and replacing it with a different kind of asset which is appropriate to that place in the machine. And for doing that, the feds should be able to make money on the deal. But you have to be big enough to make the deal at all in order for it to make sense: there is no individual hedge fund or group of hedge funds which can do this, because it only works if it actually has the macro effect of loosening up credit. Otherwise we go into a depression, and smart money just sits out a depression.
The feds are basically proposing to swap oil for diamonds because diamonds don't make a very good lubricant. Asking why the holders of money market accounts don't just voluntarily do it themselves is like asking why we shouldn't take more oil out of the sump and put it back into the filler tube instead of swapping the diamonds in the sump for oil.
Fourth, when it comes to long term predictions of effects by economists, I trust them about as much as I trust long term predictions about the effects of our actions on the global climate. Those predictions are not worth the paper they are printed on in terms of priority: it is like worrying about the effects of our tanks on global warming in the middle of a war. Yes, there is the law of unintended consequences; but right now we have to worry about the consequences we know. It isn't short sighted to take emergency action in a real emergency. I explore this theme a bit more fully in this post at my personal blog.
Related to this is is the notion that debt per se is bad; that more particularly the government taking on debt is bad. That is simply not the case. There are times when it is absolutely imperative to spend more than you earn in order to stay out of trouble: to take out a loan to pay for your appendectomy or to have your car fixed or whatever. If you have a mortgage or a car loan you are doing it yourself right now, and with significantly less legitimate motivation.
The problem with the national debt is not that it exists, but what it has been spent on. To the extent that the national debt is at work on productive endeavors which expand the tax base and increase the flourishing of the country - a sadly small extent, I suspect - it is a good thing. Carrying debt is intrinsically neutral; it can be extrinsically good, or extrinsically bad, depending on circumstances. Averting a credit lockup by buying up valuable but illiquid securities is among the best reasons ever proposed for issuing government debt, comparable perhaps to issuing government bonds to finance a necessary defensive war.
Fifth, there are a ton of perfectly legitimate regulatory/etc things we need to worry about, to make this not happen again. They are far less immediate in priority than preventing a freeze up of the credit system, though that does not mean that they are not very, very important.
Sixth, many conservatives don't like the idea of government intervention in this because it smacks of socialism. But a big crash would and perhaps will give us lots more socialism, good and hard, and probably much worse besides.
Finally, the longer it takes to get to intervention the more expensive and socialistic it will be. The initial proposed intervention without doubt left a lot to be desired; the modifications and additions being proposed by the politicians are almost universally bad, and are likely to get worse. For example, the Republican proposal to provide "insurance" instead of buying the securities outright, though they (with apparently no sense of irony) present it as a way of protecting taxpayers, is a boondoggle so bad I can't believe they had the audacity to propose it. Think about it: the plan is to sell 'insurance' protecting the downside of these securities, without participating in any of the upside. I don't know if they sincerely see this as something other than a direct transfer of wealth from taxpayers to the very institutions which are holding the illiquid paper, but that is what it is in fact. I could go on -- the pork-barrel additions proposed by the Democrats, to the very organizations which contributed to the problem in the first place, are unconscionable; and the equity participation they propose looks like a really great way to create perverse and incommensurable incentives. But I've already said more than enough.