Black Monday Reax

A sampling of economic opinion from around the web. Matt Cooper:

As a short-term player, the manager of the now quarterly Weekend at Bernanke's crisis, Paulson is holding it all together. The questions is this: Will he update his Blueprint, his larger regulatory redo, to reflect the new world we're in. If there's a great gift he could leave before leaving the Treasury Department on January 20, it's to offer up a new regulatory scheme that's fitting for the world we're in.

Paul Krugman: the unknown unknowns have turned into known unknowns, the system has been experiencing postmodern bank runs. These don’t look like the old-fashioned version: with few exceptions, we’re not talking about mobs of distraught depositors pounding on closed bank doors. Instead, we’re talking about frantic phone calls and mouse clicks, as financial players pull credit lines and try to unwind counterparty risk. But the economic effects a freezing up of credit, a downward spiral in asset values are the same as those of the great bank runs of the 1930s.

Megan McArdle:

Hank Paulson is drawing a line in the sand.  In the long run, this will be a good thing, for two reasons:  if Lehman winds up in a relatively orderly fashion, it will prove to the market that it can survive a big insolvency.  And it's a clear, strong signal to markets that they shouldn't expect the feds to protect them from counterparty risk.

Jim Manzi:

Unfortunately, letting Lehman go down was probably the right decision.

Hold the glee about obnoxious bankers feeling some pain for a change. The Fed and Treasury have been, over the past year, trying to prevent contagion that could result in a major counterparty collapse. This would cause a lot more suffering on Main Street than Wall Street.

Arnold Kling:

What everybody hopes is that a lot of the mortgage loans will continue to be paid. At some point, the securities that those loans are backing will stop being orphans that nobody wants to adopt. The outstanding balances on the securities will start to decline. Pension funds and college endowments will take them into their portfolios. And the crisis will be behind us.

If it plays out that way, then Ben Bernanke will look even better than General Petraeus.