Lech Walesa, electrician turned President of Poland, famously quipped that, “it is easier to make fish soup from fish than vice versa.” He was talking about moving from quasi-socialism to a more market-based economy, but the same thought struck me when I read today’s announcement that the British Chancellor of the Exchequer will soon put in place a bank recapitalization scheme.
My first reaction was positive, particularly as this is something we have been arguing for. But then I began to wonder if the scale would be sufficient, if it would be combined with measures to restructure mortgages for people with negative equity (an important upcoming issue for the UK), and if it would be supported with a sufficient fiscal stimulus.
I don’t know if the market was having similar thoughts, but as I write (very early on Monday, Oct. 6) it seems like more people are thinking in terms of a global recession scenario (e.g., oil is approaching $90 per barrel). Once people see the need to deleverage (reduce the amount they borrow) and reduce their risks, it is hard to get them to go the other way. Measures that would have been preemptively brilliant 6 months ago, may now have very little or zero effect.
Increasingly, it seems like only a decisive package of measures will turn things around. And even then, such a package may not be easy to adopt until the situation is considerably worse than it is today.
Days to the US Presidential Election: 29.