Comments on: Dawn of A New Interregnum http://baselinescenario.com/2008/11/22/dawn-of-a-new-interregnum/ What happened to the global economy and what we can do about it Sat, 11 Feb 2012 08:48:43 +0000 hourly 1 http://wordpress.com/ By: Scott E. Pace MD http://baselinescenario.com/2008/11/22/dawn-of-a-new-interregnum/#comment-1485 Mon, 24 Nov 2008 02:16:27 +0000 http://baselinescenario.wordpress.com/?p=1362#comment-1485 Hello
I apologize I’m not an economist but having read your response in the WSJ including the 3 options you have proposed, I thought maybe some one could clarify some things. Your option # 1 (a repeat a TARP-type injection of capital ($410 billion) to all systemically important institutions because recent signs point to a possible repeat of another 9/15 – 10/14? type financial crisis) certainly appears unpleasant but very reasonable. I whole hardly agree that the big effect of the “bailout” was to restore investor confidence and prevent a “bank run” which may have led to a total collapse of our banking system, especially after the fall of Lehman Bros.
So my questions are:
1. Did any of the $390 million actually be used to acquire bad mortgage loans from the banks and would it help? It sounds like Paulson is not in favor of this approach anymore.
2. If we develop another bank run type credit crisis and stop it with the $410 billion, could it happen again? Will we have enough money to continue this cycle. I know this might be a silly question but I really don’t have a clue. I mean banks appear to be holding on to cash. The Federal Funds rate is 1%, similar to what the US saw after 9/11. But at that time money market rates were also extremely low. Now some FDIC money market rates are close to 4%, so banks must be in worse shape then people believe. Were they hurt from Lehman’s collapse or are they over leveraged and scared that if a “bank run” ensues they have the capital to say afloat. I know you guys are advocating a large financial stimulus to help with the effects of this worsening recession, but can we as a global economy hold on that long.

I’ll shut up now and wait for individuals much wiser than I to hopefully respond.
Thanks
Scott E. Pace MD

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