This Could Make 1929 Look Like A Walk In The Park

A chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.

"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.

"It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.

York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.

"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.

"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.

The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities, and is now eating into the bedrock of banking capital. "We must try to avoid the vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other," he says.

Source: Telegraph

Last Chance to Avert Great Depression

Via Economistsview.Typepad.Com:

Prosperity To End Just Around The Corner?

Congress's initial rejection of the Bush Administration's $700 billion bailout plan calls to mind an unhappy precedent. Back in 1930, the Senate passed the Smoot-Hawley Tariff Act, which raised duties on some 20,000 imported goods. Historians define this as one of the critical steps that led to the Great Depression — a tipping point when the world realized that partisan self-interest had trumped global leadership on Capitol Hill.

It's fair to ask whether America's lawmakers could do it again. The bursting of the debt-fueled property bubble and the crippling losses suffered by banks, together with the political dithering of recent days, have set in motion a chain reaction that, in the worst-case scenario, could lead to something like a 21st century version of the Depression — even if a bailout package does eventually get approved.

Anyone looking at the bail-out package as the salvation for the banking system or the U.S. economy is dead wrong. The problems in the economy and the banking system have gone far beyond what the package can fix.

There is a crisis of confidence in the financial system, and that won’t be fixed by the bail-out package. There is a crisis of confidence in political leadership. There is a well deserved mistrust of Wall Street and others whose greed and recklessness got us into this mess. And there are signs the U.S. economy continues to get worse, including house prices which continue to decline.

And we know it’s not just a U.S. problem. There are fears of a worldwide recession.

According to George Magnus, senior economic adviser at UBS, about 40 percent of OECD economies are in effect already in recession. He puts it all down to deleveraging, as banks cuts back on their lending.