Karl Polanyi was one of the great social analysts of the 20th century.  I have since May of this year been saying that the magnitude of the economic crisis that was approaching could provide the opportunity for fundamental change.  Obama is a giant question mark in this regard.  His background and training seemingly predispose him to maintaining the existing system and negotiating compromises amongst various competing power centers.  This is looking less and less viable as an option.

Paulson's $700 billion dollar fix hasn't fixed anything yet and is not likely to.  It tries to prop up the existing financial system, which is likely fatally poisoned.  Financial institutions can't trust each other.  All know what has been going on.  Injecting capital into poisoned institutions doesn't make them credible or willing to lend.  They want to hang on to any new money to cover bad bets soon coming due and all existing counterparties know or fear that they will fail anyway.  When letters of credit for export are not accepted by counterparties as a result of fear of institution risk, trade freezes.  A more radical solution is required.

The best short term solution is to create new, untainted banks with government backing. If they are required to follow conservative practices and to direct their lending to commercial credit, or commercial paper, letters of credit for trade, student loans, consumer credit and mortgages the economy could be unfrozen.  Since banks in the US typically are required to have a 3% capital reserve, $267 billion from the US Treasury to new banks would create $8.9 trillion of new loan capacity.  That is over half of last year's Gross Domestic Product and it should suffice to defrost the credit markets in the USA.

Similar actions of proportionate scale in Europe and Asia will likely be required.  Once that has been accomplished the real economy will be released from its condition of being held hostage to the financial industry world wide.  Existing banks in the USA can be taken over by the FDIC as required, with their depositors protected they can be shorn of their toxic assets, which should be left with the bank holding companies, and merged with one of the new banks or recapitalized by the government in return for preferred senior stock and provided with new top management.  Former management can look to the holding company for their golden parachutes.

Solving the credit crunch isn't rocket science.  It just requires abandoning the idea of saving existing institutions as the first and only priority.  Save the economy and the existing financial sector can be left to burn.  If derivatives don't work as intended, the individuals and institutions damaged are no longer central to the economy and can be allowed to go bankrupt.  A large portion of hedge fund investors are high net worth individuals.  They can afford the hit better than the average taxpayer.  Note that while creating new banks with federal money would be anathema to market fundamentalists, the fact that the cost of saving them would not be imposed on the taxpayer would be wildly popular.  Creation of the banks can be justified as the surest and quickest means of defrosting the credit market and thereby saving the real economy.

The next social imperative is fixing campaign finance.    Elected representatives must be freed from economic slavery to the moneyed interests.  Our representatives cannot act in the interest of the vast majority of their constituents while beholden to big contributors.  Don't try to restrict contributions by anyone.  Just provide all candidates with threshold support with more money for their campaigns than was spent in the last election out of public monies.  Even were the cost several billion dollars per election, it would be vastly cheaper than the current system is proving to be.

With elected representatives freed from control by moneyed interests and with those moneyed interests distracted by the ongoing financial calamity in the private sector financial community, attention can be turned to health care, creation of a sustainable energy and transportation infrastructure and the creation of a social democracy and social infrastructure, etc.  This could be the beginning of a new golden age in the USA.

"It is not necessary to have hope in order to persevere."