An excellent overview of the financial aspects of the current crises. What I would really love to see you explicate is how the financial system can be "tied" or "bound" (gagged, too?) to the real economy. My view of the situation is that the financial markets are in crises exactly because they have grown so much bigger than the real economy has - the point made two weeks ago by Eric Zencey in The roots of the subprime crisis
http://www.eurotrib.com/story/2008/3/11/122016/316

The point is, to use an old adage, you can't eat bonds or other paper (well, you could, but the nutritional value is questionable, and it would certainly be far too much roughage). It is the real economy that provides what we need to live - the food, clothing, shelter, transportation, medical services, education, and so. How then do we ensure that the financial system is first and foremost serving the needs and interests of the real economy?

The situation we find ourselves in today is that the real economy has been neglected and so distorted that so many of the costs of externalities have been borne by the ecological environment that many experts and laymen believe we are threatening our very physical existence. At the very least, it makes no sense to continue to burn fossil fuels as the basis for most activity in the real economy: whether they last ten years, a hundred years, or a thousand years really does not matter, there simply are finite supplies of the stuff. Personally, more worrisome to me are the very apparent strains on fresh water supplies.

Now, fixing these problems will require enormous amounts of money. Where shall such amounts be obtained? Under our present financial arrangements, they cannot. Yet, the equivalent of three to five trillion dollars or more are traded each and every day in various financial markets around the world. I would venture to guess that some 99 percent of those financial flows do nothing at all to help the real economy; certainly they do nothing to help solve the problems we face in resource depletion and misuse. Thus, the major problem I see that needs to be solved is how to compel those flows of money (or credit, or whatever the technically term is), into helping solve the real economic problems that we face. As I have written before: how do we ensure that the credit mechanism of the economy is not being misused for private gain? How do we ensure that the credit mechanism of the economy is instead being misused for to advance the public good?

Here is where the fight lies. Neo-liberal economic theology, laissez faire posits that the greatest public good results when the markets are given the widest possible freedom. I believe the current crises - taken on its own merits as merely financial crises and leaving aside the whole issue of how the financial systems helps or hurts the real economy - shows that Neo-liberal economic theology is grievously mistaken in its approach to achieving the greatest public good. What comes now is the political struggle as certain vested interests argue vociferously for - what it boils down to - their "right" to make a profit at the expense of the public good. These vested interests of course can never admit that the public good - in terms of the ecological environment and / or the physical capacity of the real economy to support and sustain a dignified level of human life for everyone - is now so endangered that any supposed "right" to make a profit at the expense of the public good can no longer be tolerated.

But to return to my key question: How do we ensure that the credit mechanism of the economy is not being misused for private gain? How do we ensure that the credit mechanism of the economy is instead being misused for to advance the public good? And the credit mechanism, of course, is the financial system.