Thursday, March 19, 2009


This article by economist James K. Galbraith in the Atlantic Monthly is one of the best that I've read on what's happening in the economy. It's long, but worth the read. First, why the current plan won't work:

Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital ... The idea is that one can fix the banks from the top down, by reestablishing markets for their bad securities. If the idea seems familiar, it is: Henry Paulson also pressed for this, to the point of winning congressional approval. But then he abandoned the idea. Why? He learned it could not work.
This is not encouraging. But wait, it gets better:

In short, if we are in a true collapse of finance, our models will not serve. It is then appropriate to reach back, past the postwar years, to the experience of the Great Depression. And this can only be done by qualitative and historical analysis. Our modern numerical models just don’t capture the key feature of that crisis—which is, precisely, the collapse of the financial system.
Here's what Galbraith sees as the ultimate sign that we are on the road to recovery:

... the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.
I agree with this assessment. This will require that we do something about household debt loads across the country (at record highs), and work on putting more money in the hands of labor (increase wage levels).

There's more, but this is a good start. Read the article.

- Mark

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