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<<I am completely lost. What does the government have to do with the pricing of the assets? Now, we seem to be adding vodoo politics to our vodoo economics! (Sorry, couldn't resist.)

Fixing the banks is a separate problem from that of fixing the economy. Most economists agree that fixing the banks is a prerequisite to fixing the economy. But fixing the banks doesn't automatically fix the economy.>>

Government intervention has a lot to do with the pricing of assets.

Plans have been floated at various times in the past year for government subsidies to create artificial floors for housing prices. These thankfully fell through.

The PPIP is a government subsidized effort to clear the bank's balance sheets of toxic assets at prices above what the market would pay for them.

Fixing the banks is not separate from fixing the economy -- as you state, it is a prerequisite. I completely agree that it doesn't solve the problems, but the economy can't be fixed without fixing the banks.

Government spending may indeed help pull the economy out of this slump, but the mass of debt it is running up in the process could very well stifle growth down the road. For the US to take on debt to revivie its economy now is calling on future generations to pay for our failures.

I may be a little fuzzy on this, so feel free to correct me, but as I interpret it, Keynes called on the US (at the time the world creditor and exporter) to borrow to spend on developing its domestic demand in order to help pull the rest of the world out of the funk.

Since our country is already deeply in debt (individuals and gov't) I agree with you, we should be retrenching. The Keynesian solution, therefore, would require China and the other saving nations to increase their spending. The rebalancing of global accounts is what will eventually right this toppled ship.

Further debt accumulation by the US doesn't really seem to be the answer. This may require China to start spending its savings here by buying US assets (which would create an unbelievable crap storm and so probably won't happen), but that would be your source of *new demand*.
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