I could not believe that the DOW had lost 777 points on Monday.  It was the market’s worst day in history.  Of course we know it was triggered, in (large) part, because the House voted against the bailout plan.

I’ve been investing for about two years now, but have never seen this before.  Some people have been trading for 30 years and have never seen this before!!  The market has been so volatile lately and for good reason.  No one has any clue as to what is going on.  To make sense of recent news, everyone and their pets have written on this topic.  The news lately has really been about 3 things.  The bailout, the election and Sarah Palin’s lack of understanding for evolution.

Two good blog posts (aside from my favorite that I mention below) that I’ve come across recently are the Top 10 Articles on the Financial Crisis and Maturity transformation considered harmful.  They try to give insight into the cause for the current crisis and one even puts forth the notion that the American banking system is flawed at its roots.

I’m starting to agree.

But… we cannot change the past.  We can only use those experiences to better prepare for the future.  Banks are failing, if they haven’t already.  Banks, to consumers, are essentially a way to borrow/withdraw and deposit money, right?  Well there have been hundreds of ideas that cut out the middle man, why not do that here to?

There are web apps that exist today that conduct business in a similar fashion.  Take Kiva.org that allows you to lend money to entrepreneurs in developing countries with a fixed interest rate.  It’s a mix of charity and an investment.  It’s like a feel-good investment.  Well if they have a system in place to lend money and repay it later, why can’t the U.S. adopt that idea?

It seems to me that a market has been created, we just don’t have any players in the market yet… and probably for good reason.  Assuming for a second that a solution could be crafted in a timely manner (like say yesterday) the other obstacle would still be the parties, like big banks and their shareholders, that would likely capitalize on such a bailout.  Then there are also “favors,” but of course that doesn’t happen in the gov’t.

As I started searching for sources to back up my idea, I came across a post by Steven Landburg in The Atlantic titled, “Not Buying It,” where he states my idea really clearly:

So what’s special about banks? According to what I keep reading, it’s that without banks, nobody can borrow, and the economy grinds to a halt.

Well, let’s think about that. Banks don’t lend their own money; they lend other people’s (their depositors’ and their stockholders’). Just because the banks disappear doesn’t mean the lenders will. Borrowers will still want to borrow and lenders will still want to lend. The only question is whether they’ll be able to find each other.

That’s one reason I feel squeamish about the official pronouncements we’ve been getting. They tell us bank failures will make it hard to borrow but never that bank failures will make it hard to lend. But every borrower is paired with a lender, so it’s odd to state the problem so asymmetrically. This makes me suspect that the official pronouncers have not entirely thought this thing through.

What do you think?

Btw, if anyone is up for the challenge I would gladly lend my programming skills to help construct a solution.  I bet if we called to the community we could get something built in less than a month!

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Update on 10/6: I was in a bit of a rush when I first wrote this as I was trying to cram some initial thoughts of a couple articles I read before I got on a plane for Chicago.  I just read Warren Buffett explains the credit crisis and it’s a very good read.  My intention for this article wasn’t to say, “Hey.. let’s web 2.0 this market!”  Ahhh.. that term really bugs me.  No, it was really to say, “Hey, something is fundamentally broken.

People, myself included, have a hard time not jumping on a bandwagon when it’s reaping rewards — even if the fundamentals tell you different.  My opinion is that if we opened this problem up and created a market with large potential, entrepreneurs may flock to it and work smart to solve it.  Maybe instead of $150 billion in “sweeteners,” we’d have a solution that benefited the taxpayers first.