AFTER THE MONEY’S GONE

30 01 2008

Two good stories about why the economy is just going to get screwier…

The black box economy

 …there’s a collective confidence that the market is strong enough to correct itself, and that experts in charge of the financial system will understand how to mount a vigorous defense.

Should we be so confident this time? A handful of financial theorists and thinkers are now saying we shouldn’t. The drumbeat of bad news over the past year, they say, is only a symptom of something new and unsettling – a deeper change in the financial system that may leave regulators, and even Congress, powerless when they try to wield their usual tools.

That something is the immense shadow economy of novel and poorly understood financial instruments created by hedge funds and investment banks over the past decade – a web of extraordinarily complex securities and wagers that has made the world’s financial system so opaque and entangled that even many experts confess that they no longer understand how it works.

US slides into dangerous 1930s ‘liquidity trap’

By Ambrose Evans-Pritchard in Davos

Last Updated: 12:29am GMT 25/01/2008


The United States is sliding towards a dangerous 1930s-style “liquidity trap” that cannot easily be stopped by drastic cuts in interest rates, Nobel economist Joseph Stiglitz has warned.

*** 

Professor Stiglitz, former chair of the White House Council of Economic Advisers, said it takes far too long for monetary policy to work its magic. This will not gain much traction in the midst of a housing crash.

“People have been drawing home equity out of the houses at a rate of $700bn or $800bn a year. It’s been a huge boost to consumption, but that game is now up. House prices are going to continue falling, and lower rates won’t stop that this point,” he said.

“As a Keynesian, I’d say the biggest back for the buck in terms of immediate stimulus would be unemployment assistance and tax rebates for the poor. That will feed through quickly, but set against the magnitude of the problem, even a fiscal stimulus package of $150bn is not going to be enough,” he said.

As Ted Koppel asked on NPR today, “Where is this $150B coming from? Are we going to borrow it from the Chinese or just print it up?”

 

 

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