Bernanke is right about the past, Anna Schwartz conveyed, “but he is fighting the wrong war today; the present crisis has nothing to do with a lack of liquidity.” President Obama’s stimulus is similarly irrelevant, she believes, since the crisis also has nothing to do with a lack of demand or investment.OLD1953 wrote: As I said in a post on the daily news, there are two economies in the USA that are intertwined, but not the same. One manages alterations in the physical world and is rewarded for those alterations. This is the source of all physical goods and services, if you can see it, listen to it, eat it, wear it or otherwise use it directly, it's part of this economy. The other economy deals solely in the manipulation of symbols deriving their value from these alterations in the physical world, or the organizations or individuals that perform such alterations, including the past, present or future value of such alterations (assumed under a set of assumptions that may or may not be accurate and may or may not be revealed to those outside the inner circle). This is the world of banks, brokers, futures markets, etc.
Just incidentally, this is why Bernanke's efforts have come to so little. He can only manipulate the second economy, and if the second economy isn't effective in boosting the first economy, then he can't do anything at all. Graphs of stimulus dollars vs economic growth show that he's simply SOL.
If you've got a better reason, lets hear it.
Investors would then start speculating on short-term bets—whether tulips in the seventeenth century or sub-prime and more recently seeking to beat the expected inflation. Eventually, such “manias,” as Schwartz calls them, would begin replacing long-term investment, thus destroying entrepreneurship and harming economic growth. The credit crunch, which is the recession’s actual cause, comes only from a lack of trust, argues Schwartz. Lenders aren’t lending because they don’t know who is solvent, and they can’t know who is solvent because portfolios remain full of housing securities and other toxic assets. To rekindle the credit market, the banks must get rid of those toxic assets. That’s why Schwartz supported, in principle, the Bush administration’s first proposal for responding to the crisis—to buy bad assets from banks—though not, she emphasizes, while pricing those assets so generously as to prop up failed institutions. The administration abandoned its plan when it appeared too complicated to price the assets. Bernanke and then–Treasury secretary Henry Paulson subsequently shifted to recapitalizing the banks directly. “Doing so is shifting from trying to save the banking system to trying to save bankers, which is not the same thing,” Schwartz says. “Ultimately, though, firms that made wrong decisions should fail.