Friday, March 13, 2009


Klein on Summers:
That, at least, is how it should go. But at the moment, the normal market processes are broken. "It was a central insight of Keynes’ General Theory that two or three times each century, the self-equilibrating properties of markets break down as stabilizing mechanisms are overwhelmed by vicious cycles. And the right economic metaphor becomes an avalanche rather than a thermostat. That is what we are experiencing right now." Summers went on to tick off five of the mechanisms that seem to be feeding on themselves rather than being tamed by the market's Econ 101 tendency towards balance:

* Declining asset prices lead to margin calls and de-leveraging, which leads to further declines in prices.

* Lower asset prices means banks hold less capital. Less capital means less lending. Less lending means lower asset prices.

* Falling home prices lead to foreclosures, which lead home prices to fall even further.

* A weakened financial system leads to less borrowing and spending which leads to a weakened economy, which leads to a weakened financial system.

* Lower incomes lead to less spending, which leads to less employment, which leads to lower incomes.

No comments: