Thursday, October 9, 2008

The Needed White Knight

Brad DeLong identifies the needed white knight. In fact he identifies the need for a cavalry to come charging over the hill with the bugle blaring "Charge!" with all the governments of the world in the saddle, packing as much "heat" as they can, coming rushing into the market to recapitalize and refloat everything in sight...

What we need right now are:

  • Coordinated fiscal expansions across the globe: if the world economy is not now in something close enough to a liquidity trap to make no difference, it soon will be.
  • Coordinated monetary expansions across the globe: a bank is any organization that borrows or accepts investments short and lends long; the durations of its assets and liabilities are deliberately mismatched; when the entire banking sector is insolvent at current market prices, anything that reduces interest rates all along the yield curve helps reduce the magnitude of the insolvency.
  • Coordinated banking sector recapitalizations across the globe: since at least 1844 there has been broad consensus that the short-term price of safe liquidity is too important to be left to the market; now there is growing consensus that the price of risk is too important to be left to the market as well. For the government to operate on the price of risk through Operations Twist on a Galatic scale is infeasible. That means that the aggregate degree of capitalization of the banking system must become the object of policy choice. Call it socialism in one sector.

We need these now.

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