Thursday, October 16, 2008

The Steps to Stop Doom

Here is an excellent article by Brad DeLong, published in the UK's Guardian newspaper, that outlines all the steps taken to prevent the impending collapse from the financial crisis. It is very useful summary of all the steps taken to get where we are today and a sobering look at the few options left open to keep us from a world-wide Great Depression...
It was time for Plan F. If the prospect of buying up mortgage-backed securities did not boost asset prices and bring banks enough investment profits to create confidence that they were not all going bankrupt next month, governments could invest public money in the banks whether they liked it or not, thus making them so well-capitalised that their failure would be inconceivable.


Now we get to see whether Plan F will work, and whether this recapitalisation of the global banking system with public money will stop the slide of the world economy, and keep us in mild recession rather than severe recession or even depression.

There is every reason to hope that it will. The liquidity-squeeze theory, the expected-deflation theory and the Bernanke banking-collapse theory were the only live theories of the Great Depression. The first two no longer seem viable. (The past year has been a big intellectual victory for Bernanke-as-academic.) So if we can counteract the chain of causation of the third - the only one left standing - we should be in no danger of even a not-so-great depression. But the theory that recapitalising the banking system will cure what ails the global economy is, at the moment, only a theory. It could be wrong.

If Plan F fails, we move to Plan G: we pull the Keynesian fire alarm and begin an enormous government infrastructure building programme in the whole North Atlantic to keep away depression.

But as of now there is every reason to hope that it will work - that this time, for sure, what our magicians pull out of the hat will be the desired rabbit.

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