Bloomberg
January 3, 2012
The New Year opens with greater nervousness in financial markets and among policy makers than at any time since the Great Depression.
The gloom is deeper even than in the aftermath of the collapse of Lehman Brothers Holdings Inc. in 2008, a much greater calamity than anything that actually happened in 2011 (as opposed to what people feared might happen). This dark outlook stems from a state of mind we share with those who lived through the Depression era: the conviction that available policy tools are limited in their effectiveness.
The modern crisis has two parts: an inability to envisage the long-term future; and a realization that, as a consequence, there is no such thing as a safe or secure asset. This combination makes for short-termism.
The difference between now and the Lehman episode is that in 2008-2009, policy makers and average people still had faith that magic policy bullets existed to address the crisis. In particular, there was a broad consensus that contra-cyclical fiscal and monetary policy could prevent a Great Depression.
Monetary policy did help stabilize expectations in 2009, but the actions taken by the big industrial countries, in particular the U.S., have been criticized in some emerging markets -- notably Brazil and Turkey -- as a cause of inflation and asset bubbles.
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