Questions and an analogy.

[randomness]

My previous post elicited some answers to questions I wasn't asking, e.g., "should we avoid a financial meltdown" or "what happens if the financial system melts down". One could debate those, but I'm not.

The questions which I think need to be answered are:

Are we in danger of a financial meltdown? (and how quickly will it happen?)

What do we do about it? (and is this proposed plan the right one to fix the problem?)

It's as if we're on a ship, and a crew member discovers there's water in the bilge. Crewmembers point at the water and saying if the ship sinks we'll all drown. They keep talking about all the awful things that will happen if the ship sinks (sharks, drowning, exposure), and tout this great idea of plugging a hole in the hull with a big ball of money which they're going to collect from the passengers.

When we ask if maybe the hole might be patched with something else, or if it's small enough that maybe the pumps will work, or the watertight doors can be closed to keep the rest of the ship from filling up with water, or even if the water didn't splash in in heavy seas...they go back to talking about the sharks. Moreover, it wasn't that long ago that the captain claimed there wasn't any hole in the hull at all.

It's up to the people who want our money to convince us that using that big ball of money to plug this hole in the hull is the right idea.

Comments

[frotz.livejournal.com]

I have an interesting and visceral reaction to your analogy, in that (like anyone else who's spent a lot of time on larger boats) I have a very clear idea and have drilled endlessly on what to do, how to do it, what the useful tools are, contingencies, et cetera, ad nauseam. It's unlikely but always possible, and not the end of the world but desirous of prompt and appropriate action.

That, then, makes me wonder: shouldn't investment bankers have an equally good idea how to contain this sort of problem? Shouldn't they have been lying awake at night during previous storms mentally reviewing the locations of their economic emergency gear? Why all the (feigned?) surprise and shock?

Whether it's a sinking ship or a sinking bank, either way they've got major liquidity problems.