That translates into a lot of losses, and explains why liquidity has dried up. 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.
I don't think Krugman takes his analysis far enough. First, no matter how you cut it, there is going to be pain.......pain on the consumer level, and pain on the corporate level. Its estimated there is up to $500 billion worth of subprime out there. Taking care of a number that big will cause pain no matter how you slice it.
Secondly, in the past few weeks, they have gotten a better handle on how much bad debt there is and where it mostly is. In fact, yesterday, GS tolds its clients to buy Citi bank's bonds because they were "compellingly cheap"......in effect calling a bottom on Citi's subprime problems. And Japan is reporting they do not see subprime spreading to foreign markets in any way with the notable exception of UBS and Deutsche banks. Plus, we know that the garbage is at least worth $.27 on the dollar.
Thirdly, most of the large financial players that are effected have come clean......its not like everyone is waiting for another shoe to drop. That's not to say that all the problems have been corrected but some of the big ones have. Even the one major player that's still in denial, WAMU, has announced a plan to take care of the problem albeit a pretty weak one.
Krugman talks about solvency; that that's the issue upsetting the markets. I don't think that's correct. From what I am reading, its the fact there is no overall solution to the problem that has the markets in a turmoil. And that's primarily because the problem is a complicated one and requires a solution that includes both private industry and the Feds. What also has disappointed the markets is the Fed response to date. To be effective, they have to bring the discount and fed rates down fast....not piecemeal like they are doing. On Thursday, I figured they were taking the slow approach because of November's PPI. But when you think about it, that's pretty stupid. If we go into recession, inflation will be a distant memory. Right now, I see deflation as a much more pressing problem. That's why its imperative to get the country's financial system working again.
Not sure I've covered all the bases but that's what I see at this interlude. |
