“Almost exactly 101 years ago, J P Morgan was the lender of last resort in the panic of 1907. He, George Baker, and four others would try and ascertain which companies were hopelessly overextended and should be allowed to fail, and which were essentially healthy and could be saved. Somehow they would find ways to supply liquidity where it would do the most good. They scrutinized the collateral offered by all borrowers. When they could not determine whether Knickerbocker had enough assets to secure a loan, Morgan decided not to intervene. Finally the Trust Company of America came up with good collateral- “boxes and stacks full of certificates” - and Morgan said, “This is the place to stop the trouble.”

That’s what Bernanke and Paulson should be doing—find the boundary line of quality and offer to lend to all those with assets above that line, not below it.

“Bailouts are terribly inefficient ways of dealing with companies in distress. Chapter 11 bankruptcies are far better. Chapter 11 could have been used by Lehman Brothers, but Lehman apparently refused to consider it, and chose instead to play a game of “chicken” with the Treasury.

Prior to 1978, a company could seek Chapter 11 protection only if it was insolvent, and Chapter 11 normally meant that a company’s managers would have to relinquish control. In 1978 Congress amended Chapter 11 to delete the insolvency test, and also to allow managers to keep control of a company unless a bankruptcy judge explicitly finds them to be incompetent or untrustworthy.

“Did we learn nothing from the Savings and Loan Crisis of the late 1980s? The accounting crises of 2000-01 or the bailout of the airlines in 2004? The current crisis may indeed be worse than any we have seen since the Great Depression, but the narrative is actually fairly common in the recent history of American capitalism.

The last 30 years are littered with examples of two dissonant themes: On the one hand, we have a corporate sector advocating deregulation, singing the praises of a laissez-faire market, and criticizing government interference as fundamentally inefficient. On the other hand, we have corporations—and the population—asking for bailouts when they can’t survive the realities of the free markets they have advocated.

“In teasing, we learn to use our voices, bodies and faces, and to read those of others — the raw materials of emotional intelligence and the moral imagination. In seeking to protect our children from bullying and aggression, we risk depriving them of a most remarkable form of social exchange.

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process, and as a protector of property rights.

“Rising commodity prices are the most easily observed effect of inflation, but not inflation itself.

Inflation is not just consumer price inflation, but rather an increase in the supply of money that can inflate asset prices. When consumer prices like car prices, furniture, and oil increase, consumers are outraged and want something done about it. But when asset prices increase, many people are overjoyed.