Tuesday, September 30, 2008

1930's Redux?

Martin Wolf is associate editor and chief economics commentator at the Financial Times, and writes this about the financial crisis in the United States. Wolf is a mind that Thomas Barnett once said would be his cerebral companion of choice if stranded on a desert island.

He begins:

It is just over three score years and ten since the Great Depression. Judged by its rejection of the plan put forward by Hank Paulson, US Treasury secretary, Congress believes it is time to risk another one. That slump was, arguably, the greatest catastrophe of the 20th century: it was, among other things, responsible for the events that led to the second world war – not least Hitler’s rise. One can only imagine what horrors a depression might bring now?

Such forebodings must seem exaggerated. So, I expect, they will be. But that dire outcome is no longer impossible, not because a slump is inevitable, far from it, but because action is needed to prevent one.

We are watching the disintegration of the financial system. Finance is the web of intermediation binding economic agents to one another, across both space and time. Without it, no modern economy can survive. Yet that is now threatened, with the ongoing collapse in trust and flight to safety. We can indeed run this experiment. But why should we?

Read the whole article:
Congress decides it is worth risking depression

Earlier he had this article that opened with caution;

No doubt, the crisis has long passed the stage when governments could leave the private sector to save itself, with just a little help from central banks. For the US, the rescue of Bear Stearns was the moment when that option evaporated. But the events of the past two and a half weeks – the rescues of Fannie Mae and Freddie Mac, the failure of Lehman Brothers, the sale of Merrill Lynch, the rescue of AIG, the flight to safety in the markets and the decisions by Morgan Stanley and Goldman Sachs to become regulated bank holding companies – have made a comprehensive solution inevitable.
In detail:
Paulson’s plan was not a true solution to the crisis

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