Crisis, Bailout and the Frustration

I am feeling very frustrated and angry over the last two days as the events have unfolded in the financial world and the government response to it. No the frustration is not due to any sort of financial losses or sadness over the failing financial institutions (though many would lose jobs and thats sad. Hope everyone ends up getting new ones soon). A lot has happened in this last two weeks and overall in the last few months in the financial world. The sub-prime started unfolding at a rapid rate since Summer last year. Financial institutions, banks and others, made bad loans to home owners at depressed interest rates, maintained by the "Oracle" of economics Alan Greenspan. Then they sold those loans off to Fannie & Freddie Mac and other institutions around the world. This was a miracle of modern day finance - you spread the risk of the loan among everyone, so that no one would suffer. Financial world came up with new "innovative" products like securiatization, auction-rate securities, credit-default swaps (dont even try to understand what these things mean, because nobody on wall street really does). These new markets were touted as safe instruments which would help in spreading the risk and were completely unregulated. Federal Reserve chariman Alan Greenspan and the government ignored calls to regulate any of these markets and de-regulation was the mantra. Investment banks, insurance companies, hedge funds which are all very big players in the market were not federally regulated and even the regulation which were present were not enforced. This is not the fault of Bush administration alone, the Clinton administration had started the whole process. There was also a extraordinarily large amount of leverage in the system - banks and other institutions investing with borrowed money - one of the results of absent regulation. These bad loans started to fail in large numbers last year. Millions of homes are in foreclosure and millions of families will be thrown out of their homes. This has being clear since last year and happening every month. There was a stimuls package by the government to help the economy and only minor help to homeowners. The Bush Administration refused on grounds of moral hazard to bailout the homeowners who were behind in paying their loans. These last two weeks as the crisis deepend it became clearer that many financial institutions would fail. Fannie Mae and Freddie Mac, two institutions which were designed so that government bore the burden of losses while private sector enjoyed all the profits, were completely nationalized by the government. Then Lehman Brothers, one of the stalwarts of Wall Street, went bankrupt - government this time allowed it to fail. Then AIG, the worldest largest insurance company, which is not regulated by the Federal government was nationalized and saved by the government by giving a bridge loan of $85 billion. The Federal Reserve has pumped hunderds of billions into the market to stablize it. 

Until all this happened it was ok but now there is a plan to create a big fund by government which would buy all bad loans from everyone and virtually bail everyone on wall street out at estimated cost of $800-$1 trillion with other countries Russia, China, UK and others coming out with their own mini-bailouts. There were reports in the Indian Press that Indian governement a few weeks back was planning a bailout for the airlines industry in India which has being hurt by the high petrol prices. This is really frustrating and angers me. Why?. Because I am a pure free market guy and dont like the intervention by the government. NO (Milton Friedman might fall in this category). Because government is spending tax payers dollars wastefully putting the money at risk. NO (I am not that concerned about this). Then Why?. I applaud and appreciate the work done by people within the government over this. Look at the efficiency, within a week government officials have chalked out a detailed plan on how to save the economy and the world in a infinitely complex financial universe. Who says government cant be efficient. The frustration lies in the injustice. Why does Wall Street deserve a bailout, created as a result of their risk taking and mistakes, but people in New Orleans dont. Government today announced that it will retroactively insure all money-market funds. This means that all money invested in these funds is safe, no matter how bad the managers of the fund have screwed up. Why didnt the government retroactively provide flood insurance to all houses in New Orleans after Katrina. That would surely have saved a lot of pain. 

Why do millions suffering from the food crisis world wide dont deserve a bailout while Wall Street does?. Since 2003 cereal prices have increased more than 250% resulting in widespread hunger across the world. Millions are on the verge of famine in Eastern Africa according to a recent UN report. The reason of the crisis are multiple - increasing meat consumption in China and the developed world, ethanol policy in US and Europe, drought in places, weak dollar, increasing oil prices, neglect of agriculture, unfair trade policies, decreasing purchasing power of the poor and the increasing inequality around the world. None of the reasons are due to mistakes/risk taking on part of the poor - who are the worst sufferers - as is the case in Wall Street crisis. But what has the response of the world to this being. There were calls for increased aid, big conferences were organized by World Bank and the UN and a paltry sum of $700 million raised in emergency food aid by the World Food Programme. Today UN issued an emergency appeal for $700 million more to avert famine in East Africa. But who is listening with the media screaming wall street ...

How is bailing out wall street institutions ok, while bailout of farmers in India lead to calls that India was being populist (as if that is bad) and moving away from the path of reform (Economist). How is bailing out Wall Street ok, when during the Asian crisis IMF (which follows US policies) gave loans to Korea only after it got assurances from the government that it wont bailout Korean banks. How is bailing out Wall Street and spending hundreds of billions ok, when US, World Bank and IMF have criticized developing country governments for giving food subsidies. 

How is this free market capitalism, which is dead against government intervention when times are good and everybody is making money and all for government bailout when times turn bad due to risks and mistakes which capitalist made. Explain to me how? ........

I am not against government bailouts in all cases, there are cases and this crisis might be one where they are completely justified but there have being others equally or more deserving crisis - Katrina, World Food Crisis, Indiviual homeowners in the US ......Why not them?. 

Criticism/comments/clarification welcome!