A reader writes:
Your earlier dissenter didn't go far enough: things are working out about as well as possible at the moment, and thank goodness the Treasury isn't doing anything that might mess it up.
House prices are falling, which is good, because house prices relative to both wages and rents were at silly levels. The Dow is falling, which is good, because the Dow was also inflated.
A significant percentage of financial firms' assets turned out to be worthless, and the unsustainable accumulation of household debt is finally, inevitably, reversing, which is lowering future business revenues to sustainable levels. With the end of the housing equity loan racket (and consumers' credit cards maxed out), firms' future profits will be lower.
And in the financial sector, presumably Geithner and Co. did the math on how much money the banks needed to recapitalize, and found that while it was technically affordable for the US, appropriating that much money in a single bill (maybe $1.5 - 2 trillion?) was politically impossible. The goal is to work all of these imbalances out of the system as quickly as possible but without causing market panic or collapse, so that growth can start again.
The asset bubbles in housing and equities are maybe three-quarters deflated, and are starting to show some signs of bottoming. They both continue to descend at around 10% a month and should hit bottom around the summer. Meanwhile, there have already been a couple of $500+ billion rounds of recapitalizations of the banks, after which they shockingly discover that it wasn't enough, and return for another tranche. I would expect another one or two.
Couple this with the dramatic drop in the price of oil, which acts as a far larger stimulus to the economy than any of the congressionally allocated funds, and I think a whiff of recovery will be in the air by the 2009 holidays. Considering the staggering scale of the housing bubble and the near collapse of the financial markets last year, that's just amazing.
The biggest drag on the recovery will probably be the mess in Europe, as countries bicker while banks and economies teeter on the brink.