Financial Crisis

As far as the financial crisis goes, Mr Paulson has been wrong about the crisis since it began and he is wrong now. It is not the end of western civilization as we know it, but the normal functioning of the economic cycle. There are always booms and busts in capitalist systems - does anyone remember the dot com boom and bust? This is just the busting of the housing boom in America with the added twist of the explosion of subprime mortgages and their securitizaton and spread all over the financial system. Paulson does not need $700 billion to buy all the toxic assets. Let the banks write them off and raise new capital. Paulson is just a drama queen and is trying grab more power for the US Treasury.

The lesson of the Great Depression as set forth by Friedman and Schwartz in their groundbreaking "Monetary History of the United States" is that the Federal Reserve made the depression worse by allowing the money supply to contract drastically as hundreds of banks went under in the 1930s. Applied to today's crisis, that would mean that the Fed should keep lending to banks by accepting any assets they have as collateral for loans. The Fed is already doing that.

We are already in a recession and the unemployment rate will probably hit 7% in the next year. Economic cycles are a fact of life and there is no way to avoid them. By trying to avoid the consequences of the dot com bust earlier in the decade, Greenspan's Fed flooded the system with liquidity. That created the conditions for the lending boom of this decade and the subprime debacle.