In the shorter run, economists are generally in three camps when it comes to strategies for recovery.
- The fundamentalists argue that housing prices need to fall, and rapidly, so that mortgage-backed securities can be valued more accurately. Then trading can resume and financial gridlock will be undone.
- Advocates of a bailout, by contrast, argue that this process would be a disaster. In their view, the solvency problems are too great and the market is too skittish for the foreseeable future, so the government needs to buy up mortgage securities to prevent catastrophe.
- The third group, the “wait and see” faction, finds the first two alternatives unpalatable. This group hopes that if the Fed pumps enough liquidity into banks, the passage of time will improve market information, ease worries and lead to a resumption in asset trading.
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Posted by Tim at March 24, 2008 09:07 PM
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