Doug wrote: > This really gives me pause. The financial system is imploding, and is > in desperate need of recapitalization. One of the things that turns a > recession into a depression is a cascading wave of bank failures and a > contraction of credit. (This is something that Bernanke knows a lot > about.) Intervention has to be quick or it will be too late. The > longer-term stuff is very important, but unless you want to take the > risk of a severe implosion (and I know there are some who want to do > that), saying stuff like this isn't very helpful. Besides, the history > of banking crises and interventions around the world shows that the > longer you wait, the more expensive the bailout becomes, and the worse > the economic damage.
In and by itself, it's not bank failures that turn recessions into depressions. A "bank failure" means simply that the bank goes broke because turning its non-liquid assets into liquid ones requires a large loss of value while its liabilities are comparatively large and due or overdue. What turns recessions into depressions is the freezing of credit. Bank failures may or may not lead to a credit freeze. It is entirely possible for the government to nationalize the failed banks and keep credit flowing. It's not easy. It's costly. But it is entirely possible. It has been done before in other countries. And there may be a sufficient shift in the ideological center of gravity of U.S. society for something like this to be attempted here. I think it's helpful that Baker (implicitly) makes this distinction. How about the timing? Doug is right on that. Waiting carries a lot of risk. However, that risk is not going to disappear just because Congress passes the TARP. Because it is not necessarily true (or even very likely, if you ask me) that injecting a lot of cash now into the banks will lead to their effective re-capitalization and to have credit flowing again in the right amount. There's nothing in the amended Paulson plan that forces banks (broadly understood) to lend just because they have fixed their balance sheets. For all we know, those $700b may feed another short-lived speculative fever on Wall Street. It's like saying that just because you give drivers better cars and raise the speed limit, then cars will move along faster. Well, not necessarily. It may be rainy and foggy and car drivers may choose to play it safe and go slow. What is required to keep credit flowing in the economy is a big shift in expectations. Basically, people and banks have to believe that the government is ready to take decisive action to have the economy back in motion in a reasonable period of time. That will happen only after the election passes and the markets know for sure that a new administration is taking the task up. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
