Governments in advanced countries have still not recognized this onset of a crash. They have proceeded on the assumption that the injection of liquidity into the system is all that is needed. It was thought initially that this injection could be achieved through the government purchase of “toxic” securities, but widespread opposition to that scheme has now made most governments accept the idea of injection of liquidity in lieu of equity, i.e. through the part-nationalization of financial institutions.
But injection of liquidity, even in this manner, is not enough. Credit will not start flowing simply because banks can access more liquidity. There has to be adequate demand for credit for viable projects by solvent and worthwhile borrowers. And this is not happening. First, the injection of liquidity does not improve the solvency of firms saddled with “toxic” securities, so that the risk associated with lending to them remains prohibitively high. And secondly, quite apart from this, the anticipation of a Depression makes borrowers chary of borrowing and lenders chary of lending.
This anticipation in turn derives from several factors: first, the bursting of one bubble is not necessarily succeeded by the immediate formation of another, so that some recession of a more or less prolonged duration is in any case inevitable. Secondly, the very scale of the current financial crisis is such as to entail an anticipation of a prolonged recession. And thirdly, since the recession has already started, the prospects of crisis-prevention now through the usual monetary instruments (including liquidity injection) appear distinctly dim. The scenario, in which tendencies towards increased liquidity preference on the part of private individuals and institutions and a downward slide in the real economy mutually reinforce one another, has already started unfolding itself and will continue for a prolonged period, unless governments now act to inject demand into the economy directly, apart from injecting liquidity. Until this happens on a large enough scale the Depression will persist.
When the government is “owned” by the corporations, the only people that are going to benefit from bailouts are the corporations. I’ve noticed that most talk of helping “Main Street” has ended with an increased attention to Corporations.
It seems like to me that the only purpose of these bailouts is to keep these companies alive and to not worry about the little guy whose spending accounts for 70% of all economic activity. The only benefit seen by the little guy would be a side effect of helping the corporations.
Morning Terrant and that is an excellent observation…..I have a problem with the CEOs still getting there money…I mean these guys make 10 or 20 times what the president makes….something wrong there. Did you read my post about the CEO bonuses. It will make you sick. These guys still make billions even when they are terrible managers….not a bad gig, huh?