Policy-makers not only misunderstand the economic crisis, they continue to underestimate it. Consequently, solutions to date have not only failed to "fix" anything, they have made the problem worse. The problem isn't falling asset prices, it's not rising foreclosures, it's too much debt. With an assist from mark-to-market accounting,* too much debt inflated the asset bubble in the first place. Yves has it exactly right that the only "solution" to this crisis is price discovery, to allow asset prices to fall to whatever level they need to in order for markets to clear. This is bad news for over-levered balance sheets, but there's nothing else to be done.
And yet American policy-makers appear convinced that more debt can rescue an economy already drowning in it. If we can just keep the leverage party going, all will be well. $787 billion to fund "stimulus," another $9 trillion committed to guarantee bad debts, 0% interest rates and quantitative easing to drive more lending, new off balance sheet vehicles to hide from the public the toxic assets they've absorbed. All of it to be funded with debt, most of it the responsibility of taxpayers.
Did anyone one find any good economic news on the weekend or this morning? Peacenik looked and looked and looked. Peacenik didn't find any. Peacenik is trying to understand why this is happening. Peacenik is trying to understand what a credit default swap is. Peacenik just read the article posted above. It doesn't explain credit default swaps but it does make a compelling case for why the bailouts and stimulus plans will not work.
Peacenik will keep looking for good economic news. But in the meantime the DOW futures are down a lot. The Asian markets continued their march downward overnight. More and more people are contemplating collapse. Peacenik stopped by the Pub yesterday and was shocked to overhear three big believers of capitalism discussing survivalism. Actively planning survival. Peacenik needs to double check his inventory. And visit the seed store. Very Soon.
