There are many things about the current "financial crisis" that bother me.  But some of the things that bother me the most are not the absurd solutions which are proposed, but rather the way in which the crisis is framed by people, especially those in power as well as in the media.  I'll start with the media, because its the easiest to explain.

I actually blame the media for a good deal of the crisis, mostly because in an effort to push newspapers and radio ads, they make sure that there is always a crisis.  This is more than simply saying "If it bleeds, it leads".  At least when you follow that particular rule, you are choosing to publish certain stories over others.  In this case however, the media spins every story involving the economy negatively.  Several years ago, when house prices were rising with no end in sight, there was a crisis since it was keeping people from being able to afford homes and pursue the American Dream^TM, and people who did buy homes were being saddled with ever increasing amounts of debt.  Now that housing prices have gone back down, the crisis is that people who own homes can't sell them any more without taking a loss.  So rising home prices are a crisis, and falling home prices are a crisis.  The only constant is... well... crisis!  I also blame them for how they have turned "Recession" into the cataclysmic event that they seem to equate with the depression.  But that's for another post.

But the media is not solely to blame for framing this situation completely wrong.  Henry Paulson deserves much of the blame as well, if for no other reason than his mis-definition of when "markets aren't working".  That seems to be the phrase de jure.  We have to intervene, because the "markets aren't working".  If only we could get the "markets to work" again, then our problems would be solved.  But exactly what does it mean for the markets to work?  This interview in the L.A. Times from last December ought to shed some light on it.  He hems and haws quite a bit, but when you distill it all down, his definition of the markets not working seems to be that "prices are going down".

When you understand his definition of "market failure" that way, it's easy to then see the ultimate goal of all of the current bailouts and buy out plans he's put forward.  The goal is simply to get the bubble back!  Paulson is like an obsessed gambler who lost big in Vegas.  He lost his entire stake, and can see his only hope as making another big bet to get his money back.  The problem is, he doesn't have any money, so he goes to whoever will give it to him so he can go back to the tables.

The reality is though, that we had (past tense) a market failure.  The housing bubble was the market failure, and now we're finally returning to something more sensible.  The solution to the problem isn't to get the bubble back, which is the goal Ben Bernanke's latest plan.  Prices that continually go up, with no correction is a failure.  People thinking that they can buy and buy and buy with no risk is a failure.  The solution is for government to stop intervening, because the intervention is what is causing credit to freeze (emphasis mine):

A source said Treasury officials suggested at the meeting that the Realtors start a grass-roots campaign to press the mortgage rate plan with lawmakers.

Treasury officials described the situation as fluid and said the plan was still being finalized, according to people in contact with the department. The officials expressed concerns yesterday that premature disclosure of the plan could prompt Americans to put off buying homes and hold out for a better rate, sources added.

This was regarding the Bernanke's mortgage plan, but it applies just as well to Paul Ryan's idiotic $700 billion dollar bailout as well.  As soon as those in government (from Bush on down) started talking about how Washington was going to act to provide relief... that is when all activity really froze!  Under normal circumstances, companies would have gone around trying to get the best price they could with other companies on Wall Street, and probably would have been dissappointed with the result.

But as soon as folks in Washington said they were going to provide relief, companies stopped to see what Washington was going to do, because they knew they could get a better deal with Washington then they could ever get on the market, and so they waited.  Of course that made it a self fulfilling prophecy, because that caused the markets to freeze up, which turned into even more of a reason for "Washington to act now".

For other insights into the "economic crisis", check out this fine summation of how we got where we are.