October 10th, 2008
07:30 AM GMT
LONDON, England - I read a few surveys lately that alarmed even me. When asked the best place to keep your money, the stock market, a bank deposit CD, or under your mattress, 45 percent of those responding said under the mattress. Another survey showed 60 percent of those polled said a depression is likely.
Not even I, who has been bearish long before this financial meltdown began, believe a depression is likely. That would imply among other things massive unemployment. I don't see that happening. A global recession, absolutely. And even that may have been prevented if authorities had responded sooner to the current crisis, including the ill-fated decision to allow Lehman Brothers to fail.
What authorities are dealing with now is a crisis of confidence that has a stranglehold on the financial system, most people have been affected directly or indirectly. You know from my previous blog that I strongly doubt the bailout plan the U.S. Congress passed would fix the economy there.
Now Treasury Secretary Hank Paulson is coming around to the idea that recapitalization of the banks does make sense. It would be a much better use of the $700 billion than just buying up the toxic debt. The bill passed by Congress allows for that, but up until now it wasn't where Hank and Company were putting their emphasis. It still remains to be seen how far they will go with recapitalisation versus buying up the toxic debt.
The UK government has come up with the most sensible plan to dealing with the crisis, one that has won kudos on both sides of the Atlantic. But what's still missing is a coordinated global approach for the recapitalisation of banks. It's needed. A global interest cut and other actions by central banks aren't enough to restore confidence.
The fallout from the credit crisis is too far along to prevent a global recession. But unless governments pull out all the stops and take radical action, confidence will continue to erode and economies will continue to weaken. And those fearing the worst may not seem so extreme.
Tell me what you think, do you think governments need to recapitalize the banking system? What will it take to restore confidence in the banking system? Do you think those who say a depression is likely are right or wrong?
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