On Sep 28, 2008, at 11:20 PM, Jim Devine wrote:
ravi wrote:
But, IIRC, at the outset of this $700b mess, he wrote that the
Fed's logic
is flawed because they assume that the problem is the lack of
liquidity.
Rather, da Krug felt, the problem was lack of trust. Everyone,
including the very scheming bankers under suspicion, was unwilling
to take the money out of the mattress and put it elsewhere.
Is that true from your recollection, or am I reading da Krug wrong?
I don't keep track of everything that PK says, so I can't say what
exactly he's been saying. But there's no contradiction between a
crisis due to "too little capital" and one due to "lack of trust." The
value of a bank's capital (its equity) depends on how stock markets
value it. (Bank capital is more than loan-loss reserves.) Lack of
trust in banks encourages stock markets to lower their valuation of
the banks' stock.
Thanks, that makes sense, as also the issue of a freeze in lending
between and to banks ... but I took Krugman's initial analysis to mean
that the issue of trust will not be resolved by a one time injection
of funds (however big and in whatever format)...
--ravi
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