fun with sparks!
Good article in the LRB explaining some of the reasons why the world's financial system has gone into spasm. Every time I read another article about this stuff I feel I'm a little bit closer to understanding, but also that there's a whole world of complication out there the surface of which I have barely scratched.
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That was a very interesting article; it reinforces my conviction that the markets are frozen merely because everyone is afraid that the markets are frozen. Note that he wrote it in May, 5 months before the Fed allowed Lehman to collapse and confirmed everyone’s fears…
I’m not informed enough to really judge, but if you mean that it is entirely a problem of mob psychology rather than a real financial problem… I don’t know.
I’m quite sure uncertainty is a big part of the problem, but surely it’s *genuine* uncertainty about how much money various assets are worth, rather than rabbit-in-the-headlights psychological paralysis.
I suspect actually that a lot of banks know privately that their own balance sheets are seriously shaky, which doesn’t help them have much faith in the stability of their competitors. But that’s completely uninformed speculation.
I think you’re right, and it is “genuine” uncertainty about the value of various so-called assets. I blogged about this myself, and that’s how I called it: each bank knows how bad its own balance sheet is, and how much they’re covering it up; and they’re all terrified that everyone else’s balance sheet is as bad as theirs, if not worse, even though everyone else is saying “I’m fine.” That’s why they’re afraid to lend; they don’t trust anybody as a reliable counterparty.