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OpEd: Krugman

After the Money's Gone - New York Times

On Wednesday, the Federal Reserve announced plans to lend $40 billion to banks. By my count, it's the fourth high-profile attempt to rescue the financial system since things started falling apart about five months ago. Maybe this one will do the trick, but I wouldn't count on it.

In past financial crises -- the stock market crash of 1987, the aftermath of Russia's default in 1998 -- the Fed has been able to wave its magic wand and make market turmoil disappear. But this time the magic isn't working.

Why not? Because the problem with the markets isn't just a lack of liquidity -- there's also a fundamental problem of solvency.

[...]

[...]What's going on in the markets isn't an irrational panic. It's a wholly rational panic, because there's a lot of bad debt out there, and you don't know how much of that bad debt is held by the guy who wants to borrow your money.

How will it all end? Markets won't start functioning normally until investors are reasonably sure that they know where the bodies -- I mean, the bad debts -- are buried. And that probably won't happen until house prices have finished falling and financial institutions have come clean about all their losses. All of this will probably take years.

Meanwhile, anyone who expects the Fed or anyone else to come up with a plan that makes this financial crisis just go away will be sorely disappointed.



The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
by dvx (dvx.clt št gmail dotcom) on Fri Dec 14th, 2007 at 03:57:42 AM EST
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