Home > economics > Doctor, I want a second opinion…

Doctor, I want a second opinion…

…And, it’ll be ugly too:

The world is heading for a global recession and a sure bet is that it will be blamed on a subprime crisis in the US. The reality is the greatest liquidity experiment in history is now crashing to earth.

The root cause of this crisis is fractional reserve lending, and micromanagement of interest rates by the Fed in particular and Central Banks in general. The Fed started the party by slashing interest rates to 1%, but Central Banks everywhere drank the same punch to varying degrees.

The Greenspan Fed lowering interest rates to 1% fueled the initial boom, but like an addict on heroin, the same dose a second time will not have the same effect. The Fed, the ECB, etc. could have slashed rates to 0% today and it would not have mattered one bit.

The reason is simple: There is no reason for banks to go on a lending spree with consumers tossing in the towel, unemployment rising, and rampant overcapacity everywhere one looks with the exception of the energy sector.

Consumers are tapped out, not just in the US, but in nearly every country on the planet. We had our party, and a fine party it was. However, the party is over and the bill is now past due. The price is a global recession. That price must be paid no matter what Central Banks do.

–Mike “Mish” Shedlock, “Global Coordinated Rate Cuts Won’t Solve Economic Crisis

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  1. October 9, 2008 at 4:02 am

    This is true of course. But governments throughout the word lead the charge, spending money as if they had just been given a new credit card and not even stopping to pause for thought when they received the first statement indicating that had exceeded their credit limit. Governments must set an example, but equally, citizens must accept their own responsibility, where we live should be considered a home, not a house or asset.

  2. charley2u
    October 9, 2008 at 12:14 pm

    Hey, UK,

    I agree completely – the big danger here is that everything considered an asset will be plowed under, as during the Great Depression, to support asset values. Our homes, however, are perfectly able to fill their use function even in the absence of a market price.

    Try as I might, I have not been able to find an accurate review of public opinion toward the British government new bank plan.

    If you have any information – even anecdotal, I would very much appreciate hearing it.

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