Some interesting questions (and answers) on the morality of business, Austrians, similarities and differences between the crises in the US and UK,Fannie Mae and Freddie Mac's role in the crisis, the politics of quantitative and credit easing, the proper interpretation of Keynes, and how long it will take for job losses to end:
[via The Big Picture]
Speech: The Crisis and the Policy Response, Ben Bernanke
Bernanke's message in his speech is one I agree with. He says that fiscal policy alone won't be enough, if we want to sustain the stimulus we need to repair financial markets, and there is more work to do there, including more recapitalization, more guarantees, and (perhaps) direct purchases of toxic assets. Without such measures, which are complements to fiscal policy, it's possible that the fiscal stimulus will die out after the initial impulse rather than being sustained.
James Kwak continues along these lines:
Why Fiscal Stimulus Is Not Enough: Ben Bernanke gave a speech today ... outlining the Federal Reserve’s response to the financial crisis... Although the Obama team and Congress have been focusing on the politically popular fiscal stimulus plan, replete with hundreds of billions of dollars in tax cuts, Bernanke emphasized that stimulus will not be enough (something that Larry Summers seems to agree with, as Simon noted). Here’s the relevant passage:
with the worsening of the economy’s growth prospects, continued credit losses and asset markdowns may maintain for a time the pressure on the capital and balance sheet capacities of financial institutions. Consequently, more capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets. A continuing barrier to private investment in financial institutions is the large quantity of troubled, hard-to-value assets that remain on institutions’ balance sheets. The presence of these assets significantly increases uncertainty about the underlying value of these institutions and may inhibit both new private investment and new lending. . . . In addition, efforts to reduce preventable foreclosures, among other benefits, could strengthen the housing market and reduce mortgage losses, thereby increasing financial stability.
In a nutshell: as the economy gets worse, more and more loans default, eating into banks’ capital cushions; investors are still nervous about all those toxic assets; and the continuing collapse of the housing market hurts all of those mortgages and mortgage-backed securities banks are holding. And as banks teeter toward insolvency, people stop lending them money, and they stop lending people money.
On the plus side, the famous TED spread dipped below 1 today, a sign that credit markets are doing much better than back in September. (...Calculated Risk ... shows improvements in other parts of the credit markets, not just interbank lending.)
On the minus side, CDS spreads have shot up on Citigroup and Bank of America in the last week... So while there seems to be general improvement in the credit markets, the underlying problems have not been solved.