People always ask me whether we are headed toward another Great Depression or not. It seems if real GDP growth even so much as falls from 3% to 2%, folks look at me like Fred Sanford and wail "Oh no, this is the big one, I'm coming Elizabeth!" I guess it comes with the territory.
I have never been one to sound the alarm bell in response to such queries...until now. The key to what makes this different from the Depression is the response we have from our government agencies. If Congress is now going to short circuit that effort to clean up this mess, then all bets are off. Waiting around and dithering is not an option. But that is what Congress does best. Go ahead and ask serious questions about how to structure the deal. Loan financial institutions the money, demand equity positions to protect the taxpayer, or buy up the rotten paper. But do it. Now is not the time to teach people lessons about their imprudence (hint: Fannie and Freddie). We know from the economic history of the Depression that once the government gets religion and tries to do something to help, it is too late. You simply can not rip the financial plumbing from the macro economy one month and then turn around and fix it the next month by lowering the federal funds rate 25 basis points. It would takes years to resurrect. Years of wading through an economic fever swamp. If Congress does not act, and soon, get your waders on and apply bug spray. I have been in swamps chasing ducks many, many times. It ain't no party.
Warning: Ignore Ben Bernanke at your own peril (are you listening Senator DeMint?). Financial crises get messy and go non-linear very quickly. That thing in your hands is not an electric bowling ball and an electric clock that tells you when it is time to bowl. It is a ticking bomb that is looking to go off. So what are you going to do? Go bowling or defuse it?