No Depression

Here is a brave and very interesting piece by Larry Kotlikoff and Perry Mehrling. I wonder if it is correct.

Global markets have not been reassured by the coordinated interest rate cuts of several central banks or by recent congressional action, but they should be. Our bet is that financial markets will return to normal in short order and that the U.S. economy will squeak by with a moderate recession. Recapitalizing the banks and working out mortgages will take time, but the financial system will not collapse -- the government won't let it.

The markets, of course, seem to be factoring in some probability of collapse. Why is this wrong?

For starters, the biggest subprime mortgage gamblers have already failed, been nationalized or been married off, shotgun-style, to banks run by grown-ups. Yes, lots of small shoes may still drop, but the Paulson "buy-up" bill, and, ultimately, the Fed's ability to print money, provides the Treasury and Federal Reserve all the tools they need. The media don't seem to have noticed, but Section 113 of the bill authorizes government capital infusions into the banking system as necessary -- something the British government is now doing and the Swedish government successfully did in the recent past. That means any bank with a viable business will not be allowed to fail simply because it is temporarily undercapitalized.

Second, Uncle Sam (a.k.a. Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke) is doing precisely what's needed to avoid the mistakes of the 1930s. With credit markets drying up, he's turning on the faucet by recycling our panic dollars back into the financial market.

The government is taking in our money (in exchange for Treasury bills) and using it to make mortgages and buy up the assets we're too scared to hold. It's doing this via the Treasury, the Fed, the Federal Deposit Insurance Corp., the Federal Housing Administration, the Federal Home Loan Bank, Fannie Mae, Freddie Mac and other appendages. It's starting to lend directly to large and small businesses whose usual sources of credit have become unavailable.

In short, Uncle Sam is becoming our new bank.

Read the whole thing.