How Do You Recapitalize The Financial System?
There’s no easy answer to the question, “How can we fix the financial system and get ourselves out of the recession?” However, most economists agree that what the financial system needs is not simply an injection of liquidity – recapitalization is what may ultimately save the financial system. The essence underlying the financial crisis is that firms were banking on the fact that housing prices would not drop. But nonetheless, prices did fall and now the investment firms and banks do not have enough capital to mediate financially. Other economists argue that the institution in the best position to save us is the government. However, this suggestion is not welcome by everyone. First of all, it raises the issue of which firms should the government try to save first. It would also be unwise for the government to place taxpayers’ money into firms that have not been recognized, even if they are deeply insolvent. Government intervention also raises the issue of what price should they buy in.
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