Nationalisation Would've Been The Answer

We're back to the real economy again. This via Salon.com tells us how international trade is beginning to freeze. Grain is piling up at ports in North America because no one can show they have the credit to buy. This is terrifying stuff.

Meanwhile, Paul Krugman in the New York Times provides a clear overview of how this all started, what they should've done (partial nationalisation) and what's going to happen if we don't act pretty sharpish:

The current crisis started with a burst housing bubble, which led to widespread mortgage defaults, and hence to large losses at many financial institutions. That initial shock was compounded by secondary effects, as lack of capital forced banks to pull back, leading to further declines in the prices of assets, leading to more losses, and so on — a vicious circle of “deleveraging.” Pervasive loss of trust in banks, including on the part of other banks, reinforced the vicious circle.

He goes on to say:

The United States should have been in a much stronger position. And when Mr. Paulson announced his plan for a huge bailout, there was a temporary surge of optimism. But it soon became clear that the plan suffered from a fatal lack of intellectual clarity. Mr. Paulson proposed buying $700 billion worth of “troubled assets” — toxic mortgage-related securities — from banks, but he was never able to explain why this would resolve the crisis.

What he should have proposed instead, many economists agree, was direct injection of capital into financial firms: The U.S. government would provide financial institutions with the capital they need to do business, thereby halting the downward spiral, in return for partial ownership.

And, in this context, Brown has hit the nail on the head:

But on Wednesday the British government, showing the kind of clear thinking that has been all too scarce on this side of the pond, announced a plan to provide banks with £50 billion in new capital — the equivalent, relative to the size of the economy, of a $500 billion program here — together with extensive guarantees for financial transactions between banks. And U.S. Treasury officials now say that they plan to do something similar, using the authority they didn’t want but Congress gave them anyway.

Krugman has a dire warning to end this excellent article:

And the time to act is now. You may think that things can’t get any worse — but they can, and if nothing is done in the next few days, they will.

So are we now actually talking about a situation where foodstuffs could become in short supply, not because there are no foodstuffs to be had but rather because the intermediaries - the lenders - no longer trust each other?

This is intolerable.