I’ve spent quite a bit of time over the past week talking with people caught up in the financial crisis, one way or another.  Some of these people are deeply involved in finance, while others are quite far from finance but now see many more connections that they previously realized.

Three thoughts keep reappearing in these conversations:

1) People’s expectations have definitely been shaken up.  For some it was the original Paulson proposal ($700bn to be used at his discretion), coming only days after he and Mr. Bernanke said that the economy was “fundamentally” fine – by which they meant we would dodge a recession.  For others it was President Bush’s first speech on the subject, in which he said that if Congress did not pass the relevant legislation (now called the TARP), there would be very bad consequences.  And for others it was the dramatic sequence of events last weekend, from the meeting of the G7 to the abrupt U-turn on bank recapitalization, first by the Europeans and then by the US.  In any case, pretty much everyone I’ve talked now understands that we are no longer facing “business as usual”.

2) At the same time, there is still great confusion about what is going on, precisely why, and what are the options going forward.  I think this confusion is quite general, and I regard myself as no exception.  In fact, as one of my colleagues at the Peterson Institute for International Economics wisely noted last week, “if someone says they are not confused by the current situation, they are not leveling with you.”  As a result, we start to think about changing things we do, but it is reasonable to hesitate before taking real action.  I was asked earlier this week (for a weekend show produced by Marketplace, which will air on Saturday) what I am doing differently, compared with a month or a year ago.  The answer is nothing much, at least in terms of investment or spending, at least for now.

3) And it’s the “at least for now” part that is worrying.  Obviously the “authorities” (jargon for the people who run the country) in G7 and other industrialized countries woke up to the true situation about 5 or 6 days ago, and they took what is – for them – dramatic action.  I have never seen them move so far so fast, and we have tried to recognize and applaud those moves at every opportunity.  But now we wait, holding our breath, to see the effect on confidence.  I look at the US and European stock markets, as does everyone else, and my mood swings with it.  But I also look at what is happening in credit markets, particularly in emerging markets.  This does not look encouraging.  I think it is time to work seriously on measures that will reduce the costs of and speed the recovery from what appears to be a serious imminent global recession.  This is now our priority; to help, please post your ideas as comments here.

There is some evidence that the mood in the financial sector is very cautiously optimistic. The TED Spread is down 18 basis points to 3.89%, from a high of 4.64% a week ago. (This is 3-month LIBOR minus 3-month T-bills, and hence a measure of banks’ willingness to lend to each other rather than to the U.S. government.) Still, it may take weeks for banks to have cash in the places they need it and feel comfortable loaning money again.

The highly informative and frequently updated blog Calculated Risk (link also in our sidebar) is doing a daily post on this and other credit market measures, so if you’re addicted you may want to go there.

True junkies may prefer Across the Curve, which focuses exclusively on credit markets, including some you’ve never heard of.