Monday, November 24, 2008


The Citi bailout and all of the blah blah blah around it has me just as bewildered as ever. Those who think this is just about saving the stock market are outraged. Those who think this is about saving the economy are cautiously onboard. I'm still angry but I'm also concerned... and I am starting to agree with those who are seeing a bigger picture.

The market was not the ultimate economic indicator when things were looking bullish and it's not the ultimate indicator now. We've got bigger problems.

The last few grafs from Nouriel Roubini's latest pessimistic piece:

Thus, dealing with this deadly combination of deflation, liquidity traps, debt deflation and defaults that I termed as global stag-deflation may be the biggest challenge that U.S. and global policy makers may have to face in 2009. It will not be easy to prevent this toxic vicious circle unless the process of recapitalizing financial institutions via temporary partial nationalization of them is accelerated and performed in a consistent and credible way; unless such actions are combined with massive fiscal stimulus to prop up aggregate demand while private demand is in free fall; unless the debt burden of insolvent households is sharply reduced via outright large debt reduction (not cosmetic and ineffective “loan modifications”); and unless even more unorthodox and radical monetary policy actions are undertaken to prevent pervasive deflation from setting in.

Thus, while the Fed may pursue radical, “crazy” and “crazier” monetary policy actions the true policy responses to the risk of deflation may lie elsewhere: when monetary policy is in a liquidity trap a properly-targeted fiscal stimulus is more appropriate and effective; cleaning up the financial system and properly recapitalize it is necessary; and debt deflation and debt overhang problems are more directly and properly resolved through debt restructuring and debt reduction than by trying to reduce the real value of such liabilities via higher inflation.


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