Wednesday, April 8, 2009


This article really nails it. It is one of the clearest explanation of what is going on, why it can't be stopped by traditional means and what we need to do to get out of it. In short, we are in a depression not a recession. The difference is that a depression is when people's collective action are self defeating. They all try to save, cut costs and avoid taking risk and this just results in economic collapse rather than the desired outcome of improved individual balance sheets.

The only solution is truly massive government intervention because only government can organize collective action. The trouble is that the Fed, US government as well as foreign governments have not yet come to this understanding. They are still resisting nationalizing the banks and undertaking massive fiscal stimulus. Yes, the Obama administration has passed a stimulus bill but this is not nearly enough. Nor are the stimulus packages from abroad large enough. It will also be necessary for all of the governments to coordinate this action. Government as well as the market in general is still convinced this is just a deep recession not a depression. The longer they deny this, the harder it will be to fix.