Letting Wall St crash and burn means everybody in America's pension disappears - everybody over 65 is out on the street. Everybody who saved money has lost it. Nobody accepts cash anymore, after all if you put it in the bank it might dissapear. You are back to bartering chickens.
Was that not well understood beforehand? I'm Canadian, but our government will only certify certain investments. Everything else comes with the understanding that all of your money could be gone tomorrow. As such, we plan for such occasions. It is an expectation that an event like this will happen eventually.
The fact that not only have there not been high-profile prosecutions of the executives who created the conditions under which their employees engaged in systematic fraud; but the USDOJ has been actively coercing state AG's into agreeing to a thoroughgoing amnesty that will absolve most of the major players of any criminal liability. And pray tell, why would these bankers be demanding immunity from prosecution if they were not fearful that a serious investigation into their behaviour would find them guilty of, at the very least, criminal negligence if not outright fraud?
And that, my friend, is the point where you have to accept that the system is in fact broken; and that the checks and balances have been short-circuited; that the system is out of control and that we are fiscal flotsam on the tide of events from here on out.
The market essentially is a herd animal. Everything goes up or down together, in aggregate. Since wisdom in the financial market is to diversify, ie, hold in aggregate, a well-chosen portfolio generally does about as well as the market in the long term.
So if Grandma had 100K in her diversified portfolio of low-risk investments and the market exploded 50%, she'd have 50K, which represents a major loss of financial capabilities.
Whether it is better to drop such people in the cold while things reset or whether it is better to keep the cushion going, I leave to another media form, as such discussions tend to be too inflammatory online.
This is most likely not the case. There are many ways the market can "explode 50%". One way is for each security to take a 50% haircut. Another is for the high risk securities to take a 100% haircut and the low risk to take a 0% haircut. Obviously real life lies somewhere in between.
However, it's not by any means obvious that the low risk, well diversified investors would take a particularly large haircut in a market crash. This is particularly true if they don't cash out immediately after the crash.
Andrew Ross Sorkin talks about this in "Too Big To Fail" (http://www.amazon.com/Too-Big-Fail-Washington-FinancialSyste...). When things were really bad in 2008, and people were wondering what investment bank was going to go next, there was very real fear that eventually the biggest, most stable banks such as Goldman Sachs would go under. After Goldman, the next institution wouldn't be a bank. It would be GE.
That insurance fund would indeed have been wiped out, however, the government could have injected more money into it. This would have been the appropriate level for the bailout to take. Save the pension funds and FDIC insured savings, let all the large banks and brokerage houses go bust. The small business administration could also have provide some bridge loans for smaller companies stuck without capital.
See: http://en.wikipedia.org/wiki/Pension_Benefit_Guaranty_Corpor...
What are you talking about, where does the money go? Money doesn't just "disappear."
Now the Bank has $0, and owes you $100. You can no longer withdraw your money from the bank, it has "disappeared". The farmer has the $100, it still exists, but the Bank has lost it. Saying that it has "disappeared" is a way to shift the blame away from the Bank.
The joke is when you realise that the farmer isn't a farmer, he is an investment banker. And he got a $100 bonus. And he actually works for the Bank.