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August 22, 2007
David Wessel has a first-rate column in the Wall Street Journal today
Tomorrow, actually, as I write this... but in any case...
It seems these days that economists and pundits (myself included) are full of analogies. Here's a good one from David Wessel in the Wall Street Journal.
Think of the nation's economy as an automobile that requires gasoline for power (loans to businesses and consumers) and oil for lubrication (short-term credit among financial players.)
The immediate problem isn't gasoline: Banks are strong, and corporate coffers are full of cash to invest. The problem is lubrication. Countrywide Financial makes mortgages and then sells most of them to investors within weeks, but it needs short-term financing for that interval. It relied on short-term IOUs known as commercial paper but is having trouble selling that paper now.
It's worth your time to read the whole thing. He sums up in one column a lot of things that have been said in a lot of places over the last few weeks about how the financial system has changed since the crises of years past.
Posted by William Polley at August 22, 2007 11:30 PM
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Comments
Bailout for Countrywide? Looks more like a free-money, riskless-arbitrage deal for BofA to me.
http://wcvarones.blogspot.com/2007/08/omens.html
Posted by: W.C. Varones at August 22, 2007 11:39 PM
W. C. Varones -- you are right, but that is the way the problem is suppose to be resolved in a capitalist system. The strong and/or prudent pick up the pieces from the weak and/or imprudent. That contains and/or resolves the problem of insolvent financial institutions. The bad loans are transfered to the strong institution at a new lower price.
That never happened in japan and is one reason they had their extended semi-depression.
Posted by: spencer at August 23, 2007 11:11 AM