What a growing number of investors suggest is really needed is a “shock and awe” figure, enough to convince the markets that peripheral European economies will not be left to fail.For better or worse, I do not expect such a figure is forthcoming. I also do not see how such a figure would do more than postpone the basic problem, which is that several European economies have been pretending to be much wealthier than they really are and to make financial plans on that basis."
Robert Mundell on the Financial Crisis (Sean Rushton) - "Mundell argues the recent crisis had three distinct parts.
Part One was the real-estate bubble and subsequent bank-solvency crisis, which began in 2006. He says the bubble was generated primarily by the dollar’s fall after 2001, as U.S. monetary authorities made clear they wanted a lower dollar to improve exports. As the greenback dropped on foreign exchanges and against gold and other commodities, investors pursued the classic inflation hedge: They borrowed and bought hard assets, expecting to repay the debt with cheaper future dollars. Real estate, already roaring due to 1997’s expanded housing tax deduction, went into overdrive, goosed by subprime lending and mortgage securitization.
Part Two of Mundell’s analysis is the most intriguing and least understood aspect. He argues that, as the real-estate bubble burst, large quantities of fresh liquidity were demanded by the public and banks. In summer 2007, the world’s central banks supplied it and no liquidity crunch developed. But by summer 2008, spooked by rising inflation, the U.S. Federal Reserve failed to provide adequate cash, leading to dollar scarcity. Four key symptoms of tight money appeared within months: the dollar rose 30 percent against the euro; gold fell 30 percent; oil fell 80 percent; and the inflation rate dropped from 5.5 percent to negative levels. As a result, Mundell believes, Lehman Brothers collapsed, the stock market went into free fall, and a near-panic ensued. This phase was entirely preventable and constitutes one of the worst mistakes in Fed history, Mundell says. The crisis eased in early 2009, as the Fed upped the money supply, but the damage was done.
Part Three of Mundell’s analysis is the recession of 2008–09, with bailouts, rising unemployment, and skyrocketing deficits. He predicts decent growth this year, but believes unemployment will remain high and the recovery will be weak."
Scott Sumner - Goldman Sachs - "I made a nice return on ‘junk bond’ investments in the 1990s, so count me as someone not shocked by the colorful adjectives in GS emails. Does this mean GS did not violate the law? Here is where I would fall back on my post-modernism. There is no yes or no answer to that question. If one wants to get highly technical, I suppose that every single big bank in America is violating the law on an almost daily basis. How could it be otherwise? Our business law system is unimaginably complex, the legal equivalent of the distance to Alpha Centauri. (“Show me the man and I’ll find you the crime.”) The real question is: If the SEC knew these facts about GS, but the 2007-08 financial crisis had never occurred, would GS have been prosecuted? Or to put it another way; is the prosecution political?"