Economic Moment of Truth

As the world wide stock market bloodbath continues unabated - the overseas exchanges plunged overnight - it seems that those who promised swift action in the Chimperator's administration are still sitting on their hands instead of acting. Paul Krugman looks at this problem in his column today in the New York Times. The bottom line is that either swift, meaningful action is taken or things will continue to get worse. What is so frightening is that we are at the mercy of an administration that has done virtually nothing right - be it the disastrous Katrina response, an ill advised war motivated by hubris, and much more - for most of the last eight years - a very, very frightening prospect indeed.Perhaps much worse. Here are some highlights:

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Last month, when the U.S. Treasury Department allowed Lehman Brothers to fail, I wrote that Henry Paulson, the Treasury secretary, was playing financial Russian roulette. Sure enough, there was a bullet in that chamber: Lehman’s failure caused the world financial crisis, already severe, to get much, much worse.

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The consequences of Lehman’s fall were apparent within days, yet key policy players have largely wasted the past four weeks. Now they’ve reached a moment of truth: They’d better do something soon — in fact, they’d better announce a coordinated rescue plan this weekend — or the world economy may well experience its worst slump since the Great Depression.

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Let’s talk about where we are right now. The current crisis started with a burst housing bubble, which led to widespread mortgage defaults, and hence to large losses at many financial institutions. That initial shock was compounded by secondary effects, as lack of capital forced banks to pull back, leading to further declines in the prices of assets, leading to more losses, and so on — a vicious circle of “deleveraging.” Pervasive loss of trust in banks, including on the part of other banks, reinforced the vicious circle.

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The response to this downward spiral on the part of the world’s two great monetary powers — the United States, on one side, and the 15 nations that use the euro, on the other — has been woefully inadequate. . . . What he [Treasurery Secretary Paulson] should have proposed instead, many economists agree, was direct injection of capital into financial firms: The U.S. government would provide financial institutions with the capital they need to do business, thereby halting the downward spiral, in return for partial ownership. When Congress modified the Paulson plan, it introduced provisions that made such a capital injection possible, but not mandatory. And until two days ago, Mr. Paulson remained resolutely opposed to doing the right thing.

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What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort. And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.