10.17.2008

Whitney: The end of Friedmanite Economics

1--On Monday, the stock market recorded its biggest one day gain in history on news that the G-7 had settled on a plan to recapitalize the banking system. The Federal Reserve, the European Central Bank (ECB) and the Bank of England (BOE) all agreed to make direct capital injections into "systemically important" banks so they could resume lending and reduce stress in the credit markets. They also decided to insure deposits and to guarantee interbank lending. Do you think that these unprecedented steps will be enough to avert a meltdown of the financial system?

Robert Pollin: Of course, by Tuesday, the Dow fell again by over 733 points. Meanwhile, the Niekkii in Japan fell by 10 percent on Wednesday. So, thus far, the answer to whether these steps are enough, on their own, to avert a meltdown is a resounding “no.” At the same time, to be fair, these measures have yet to have any real effect on banks’ balance sheets. Thus far, the stock markets are only responding to their own guesses as to what benefits, if any, these measures will have on stabilizing the balance sheets of financial institutions.

But there is another element that came into play especially over the past day. That is the reality within financial markets that the economic crisis has spread beyond Wall Street itself. It is now clearly becoming a crisis—a recession or depression, choose your own term--spreading into the realm of jobs, incomes, public sector budgets, and private non-financial profits as well. This means that averting a meltdown of the financial system will also require a massive stimulus of the non-financial side of the economy. We haven’t heard yet about any significant plans along these lines.

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