Mon Mar 23rd, 2009 at 10:33:58 AM EST
A few days ago this amazing article was printed by the political blog
Washington Monthly (which is well worth reading for US and international politics).
It is entitled:
No Return To Normal by James K. Galbraith
It is has a US economics focus, but I am also particularly interested to hear the comments from our astute European economists here at ET, as to how you think this relates to the European and international economy: Here's one quote that caught my eye (out of many):
...in 1994, after a long period of credit crunch, banks and households were strong enough, even without a stimulus, to support a vast renewal of lending which propelled the economy forward for six years.
The Bush-era disasters guarantee that these happy patterns will not be repeated. For the first time since the 1930s, millions of American households are financially ruined. Families that two years ago enjoyed wealth in stocks and in their homes now have neither. Their 401(k)s have fallen by half, their mortgages are a burden, and their homes are an albatross. For many the best strategy is to mail the keys to the bank. This practically assures that excess supply and collapsed prices in housing will continue for years. Apart from cash--protected by deposit insurance and now desperately being conserved--the American middle class finds today that its major source of wealth is the implicit value of Social Security and Medicare--illiquid and intangible but real and inalienable in a way that home and equity values are not. And so it will remain, as long as future benefits are not cut.
In addition, some of the biggest banks are bust, almost for certain. Having abandoned prudent risk management in a climate of regulatory negligence and complicity under Bush, these banks participated gleefully in a poisonous game of abusive mortgage originations followed by rounds of pass-the-bad-penny-to-the-greater-fool. But they could not pass them all. And when in August 2007 the music stopped, banks discovered that the markets for their toxic-mortgage-backed securities had collapsed, and found themselves insolvent. Only a dogged political refusal to admit this has since kept the banks from being taken into receivership by the Federal Deposit Insurance Corporation--something the FDIC has the power to do, and has done as recently as last year with IndyMac in California.
Geithner's banking plan would (only) prolong the state of denial.
Let me emphasize his stunning point: The big banks are insolvent and pumping more money into them will only prolong and worsen the crisis. So my question to our resident economists: how does this situation effect Europe and Europeans? And are there European banks that are insolvent (besides British banks, that is)?
Anyway, I highly recommend you read this excellent article, and while you are reading it, think about how it relates to Europe - I am most interested in your comments.