Capitalism fails to collapse. What's up with that? (Part II)

While I understand your points, I just want to say that the media report on this crisis on the basis of stock market indexes and so this is the public score card. So, I think your argument is disingenuous.

Linda,

The point isn't how the media is keeping score. They are a lagging indicator in any event merely reporting on what happened...often about events long passed. The indexes are merely composites of activity of the stock market, and it is typically seen as leading indicator. Take a look a Roubini's RGE-Monitor for more extensive discussion.

Barbara!

I am becoming convinced (still want to see what volatility looks like over another week) that the best course of action would be to let the derivatives market fail.

Sure. The Fed should continue to flood the market with liquidity, but otherwise, it should do nothing. The Treasury and Congress should enact an HOLC of some type to buy underlying assets but otherwise they should do nothing. And finally, consumers and businesses should concentrate on restoring their balance sheets by paying off their credit cards, etc. unless they are insolvent in which case they should file for bankruptcy protection. Otherwise, they should do nothing and sit tight.

Here is what would happen (stop me if I am wrong) in a few short months. The balance sheets of banks, hedge funds, consumers and governments would grow stronger. As they grow stronger in time, this would foster greater confidence in the credit market and it would begin to loosen up and flow, first as a trickle and then towards the end of 2009 back to healthy levels.

That is the fix. Now, if the derivatives market doesn't shrivel up and die it will have to be regulated by the latter part of next year.

Barbara,

Thank you for responding. Overall, I don't disagree with you nor do I not believe that the credit markets are freezing up. What I was trying to point out is that when you look at any reports on the state of our economy, the report starts with stock market indexes and goes on to explain things from that basis. You chose to write this post on the premise of what the bounce in the stock market means. So, when you talk about world stock market indexes and in the next sentence say this was never a stock market issue to begin with, I find that disingenuous. With all the posts about confusion about the plan, perhaps this points to a reason why the public rejects this proposal. Maybe it is not clear to the public that this is not a stock market issue because the use of the stock market as score card implies that it is, at least in part, a stock market problem.

As an aside to your other comments, I think what Paulson/Bernanke are most scared of is that the derivatives market will fail. I think that terrifies them more than anything and is the real reason why they want this plan structured as it is because if the derivatives market fails, AIG and all our stake in that firm is gone and I think many of the large banks and especially JP Morgan Chase would be shown to be insolvent. People say JP Morgan took both sides in its CDS deals, but if that market fails, I don't think all of their matched trades will survive because I think the odds are that many of their counterparties would be taken down.

Lastly, your advice to consumers is precisely why we cannot grow our way out of this financial crisis. We all have to cut back on spending and we have to stop using credit until we have much lower debt levels. All experts I have heard agree with this but they do not talk about the consequences of rational consumer conduct resulting in a MASSIVE slow down in our consumer driven economy. Our economy is going to contract painfully no matter what we do and this contraction will further constrain the credit markets. I do not wish for large amounts of pain and suffering, but I remain convinced it's better to do this now and find out who is truly solvent and exactly how much real money we actually have than to continue to let these problems gain mass and velocity over time.

The foreign markets did even better than you suggested - Britain, France, and HK all fell initially but then rebounded to finish even or even up slightly on the day. Japan tanked and then rallied a little, but underperformed the other markets b/c of some bad Japanese economic data (unemployment in particular) that was released.