Monday, April 26, 2010

Our Giant Banking Crisis---What to Expect

Tags: Book This Time Is Different, Reinhart-Rogoff approach works, Too much Debt aways Bad,

Our Giant Banking Crisis---What to Expect
by Robin Wells and Paul Krugman

I just looked at This Time Is Different ... review and not read the two IMF book reviews with link above. It is well written and I provided a link to the whole article below. I listened and read many different views on how this crisis happened and how to fix it. All their explanations have flaws because no one really has a great grasp of the whole picture. This study comes closer. The problem is all of us, our culture, and our expectations of getting something for nothing.

Jim Kawakami, April 26, 2010,

German Chancellor Angela Merkel and Britain's Prime Minister Blair has a discussion about how well Germany's economy is doing compared to the UK. Blair asked her how did Germany do this? Merkel, an engineer, answered succinctly, we make things!

... The Reinhart-Rogoff approach has already paid off handsomely in making sense of current events. In 2007, at a time when the wise men of both Wall Street and Washington were still proclaiming the problems of subprime “contained,” Reinhart and Rogoff circulated a working paper—now largely subsumed into Chapter 13 of This Time Is Different—that compared the US housing bubble with previous episodes in other countries, and concluded that America’s profile resembled those of countries that had suffered severe financial crises. And sure enough, we had one too. Later, when many business forecasters were arguing that the deep recession would be followed by a rapid, “V-shaped” recovery, they circulated another working paper, largely subsumed into Chapter 14, describing the historical aftermath of financial crises, which suggested that we would face a prolonged period of high unemployment—and so we have.
So what is the message of This Time Is Different? In a nutshell, it is that too much debt is always dangerous. It’s dangerous when a government borrows heavily from foreigners—but it’s equally dangerous when a government borrows heavily from its own citizens. It’s dangerous, too, when the private sector borrows heavily, whether from foreigners or from itself—for banks are basically institutions that borrow from their depositors, then make loans to others, and banking crises are among the most devastating shocks an economy can face. ...

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