Notes oct 16
October 16, 2008 § Leave a comment
Hence Ben Bernanke and his Fed loaned extraordinarily freely to banks and near-banks and non-banks in order to avoid what Milton Friedman said was the key mistake that made the Depression Great:… a liquidity squeeze that made cash hard to get. Call this Plan A.
So Bernanke and his Fed lowered interest rates to what they thought were levels that might trigger inflation, as a way of making sure that no business anywhere would even begin to suspect that a deflationary spiral was in the making. That was Plan B.
So it was time for Plan C: mail out a bunch of extra tax-rebate cheques, hoping that … consumer spending … would recover with at worst a small recession.
They had to move to Plan D: case-by-case forced mergers, liquidations and nationalisations of banks and other financial institutions in order to prevent the course of events that the third theory of the Depression said had made it Great.
The failure of Lehman Brothers triggered or uncovered or brought on financial catastrophe…. It was time for Plan E: the Paulson plan, a $700bn programme by which the Treasury would buy up troubled mortgages, mortgage-backed securities and derivatives..
.The financial markets swallowed the passage of Plan E without a burp and continued on their downward spiral… It was time for Plan F…, governments could invest public money in the banks whether they liked it or not, thus making them so well-capitalised that their failure would be inconceivable…
If Plan F fails, we move to Plan G: we pull the Keynesian fire alarm and begin an enormous government infrastructure building programme in the whole North Atlantic to keep away depression.
Brad says “But as of now there is every reason to hope that it will work – that this time, for sure, what our magicians pull out of the hat will be the desired rabbit.” But the plan g scenario sounds attractive, and is the only one that is an alternative to the large earnings of the financial industry.