Linking to recent economic news piecemeal, as I’ve been doing, is useless even to me, to say nothing of my three readers, and I continue to do so out of genuine helplessness, because hitting the publish button gives me some small sense of retaliatory control over the ceaseless prognostications of global economic doom. Brown Monday transformed my feedreader into a moribund squawk box. By mid-afternoon, I genuinely missed the respite of dial-up.
Regardless, I link to this story about today’s worldwide cuts in interest rates because, reading it, I think I finally grasp the basic situation.
The situation, is this:
- The federal government’s decision to allow Lehman Brothers to fail was a huge screwup that cut the legs off banks around the world.
- Banks are no longer lending to anyone, not even each other, because their executives are so petrified of losing even more money.
- The complete lack of lending prevents many businesses and public institutions from paying their bills, because just like the average American family, businesses and governments are accustomed to operating on credit rather than cash.
- No one trusts anyone anymore.
I credit this excerpt specifically. For whatever reason, these two graphs connected weeks worth of disparate reports:
The central feature of the acute credit crunch, which began in the United States and is now spreading rapidly in Europe, is the reluctance of banks to lend at any rate because they have taken such heavy losses already and are hoarding cash.
[...]
“The key lesson is when you face a confidence issue where the market participants no longer trust each other, the conventional macroeconomic tools are not as effective,” Olaf Unteroberdoerster, the International Monetary Fund’s representative in Hong Kong, said Wednesday.
The post title is from an episode of Deadwood, by the way.
Update: Another bit related to trust, from an article about the possibility that the government my take partial ownership of some banks:
The core problem is that the smart people are realizing that the banking system is broken,” said Carl B. Weinberg, chief economist at High Frequency Economics. “Nobody knows who is holding the tainted assets, how much they have and how it affects their balance sheets. So nobody is willing to believe that anybody else isn’t insolvent, until it’s proven otherwise.
I don’t suppose we could pass a law requiring all the banks to simply fess up and provide accurate balance sheets, could we?