10/9/08

No Depression?

Don't worry, be happy - at least it won't be a Great Depression:

No Depression This Time, Uncle Sam Has Got Our Back, by Laurence J. Kotlikoff and Perry Mehrling, Commentary, Washington Post: Global markets have not been reassured by the coordinated interest rate cuts of several central banks or by recent congressional action, but they should be. Our bet is that financial markets will return to normal in short order and that the U.S. economy will squeak by with a moderate recession. Recapitalizing the banks and working out mortgages will take time, but the financial system will not collapse -- the government won't let it.

The markets, of course, seem to be factoring in some probability of collapse. Why is this wrong?

For starters, the biggest subprime mortgage gamblers have already failed, been nationalized or been married off, shotgun-style, to banks run by grown-ups. Yes, lots of small shoes may still drop, but the Paulson "buy-up" bill, and, ultimately, the Fed's ability to print money, provides the Treasury and Federal Reserve all the tools they need. The media don't seem to have noticed, but Section 113 of the bill authorizes government capital infusions into the banking system as necessary... That means any bank with a viable business will not be allowed to fail simply because it is temporarily undercapitalized.

Read on...

Peacenik finally found a semi-optimistic article about the economy. But stop reading after the first section. The following section offers an alternative scenario. The good news is that there are rational arguments that things might not get as bad as is possible. On the other hand Peacnik was shocked this morning to see news that Canadian banks are suddenly in need of some aid. Peacenik thought Canadian banks were an oasis of responsible banking. Didn't he?