David Merkel, at Aleph.com, is consistently one of the most thoughtful financial affairs commentators around.
NOT Born and Bred in the Briar Patch is a sober assessment:
I think the wrong lessons were learned by Dr. Bernanke, and many academic macroeconomists. They look at the ineffective remedies at the time [of the Great Depression]: negative monetary growth, Smoot-Hawley, and lack of stimulus, and they conclude that if they can stimulate a lot more, they can avoid Depression II.
Depressions occur because market actors take on too much debt, including financial institutions, and at the tipping point, cash flow proves insufficient to service the debt, starting a self-reinforcing bust cycle going the opposite direction of the prior self-reinforcing boom. Once the self-reinforcing bust starts, I’m sorry, but there is little that can be done. Liquidation of bad debts must happen to clear the system. In the absence of that, we can have a Japan-style scenario where rates go to zero, and we stay in a funk, or we could inflate the mess away, harming savers and pensioners. . . . .
A hidden cost here is that activism begets more activism, or, at least, a demand for more activism. If the Federal Government and the Fed are now the lenders of first resort, it is no surprise that many will come-a-beggin’. Once you are willing to lend to support one critical area of the economy, my but many areas will deem themselves critical as well. Where does it stop? At this point, I think it might have been better to let Bear, Fannie, Freddie, and AIG fail, but with some sort of expedited bankruptcy process that quickly disposes of equity rights, and converts all debt claims into varying degrees of new equity. This extinguishes debt claims, and accelerates the healing of the economy. This would be true reform.