Krugman-sensei says, in half jest, "Okay, We are a banana Republic, with nukes".
I say, when you are a banana Republic, you should act like one.
On that note, conspicuously missing from Krugman's list of options is this: monetize "the problem(s)". Bernanke is already close to being on the record that it will not be inflationary to do so. Who knows? With the pace of deleveraging in the private markets, he may be right!
Of course, the problem isn't just bad financial assets and poor financial risk management, leading to inadequate capital. It's falling house prices and defaults.
If the U.S. Government started in mitigating those last two risks, Wall Street would stabilize immediately, especially on the derivatives side of things.
Would Wall Street "reflate" as well as stabilize? Some, but there are still losses...prospectively and retrospectively. However, in crisis, stability is "purchased" through certainty, not by reserves, necessarily, or by recapitalization. Put another way, recapitalization is a fix for the bank credit squeeze, I'd hazard, but not for the uncertain outlook or assessments of the ability of the system to weather a continuation in the uncertain outlook.
Even the government cannot offer certainty, but it sure can cast a long shadow (at least it was long, until the GOP decided that debt-spending to win elections was the cost-free alternative to responsible fiscal management).
Monday, September 29, 2008
When You Are a Banana, You Should Act Like One
