Why you shouldn’t worry, why you should, and what to do

An Op-Ed article in the New York Times by Casey Mulligan, a professor of economics from the University of Chicago, lends credence to the argument that while economists know much about economics, they know little about the economy. Yves Smith of Naked Capitalism gives an illustration of how banking woes spill over into the real world with the credit crunch crashing international shipping. Finally, a good overview of the need to restore confidence in the banking system by Barry Ritholz of The Big Picture.

An Economy You Can Bank On – The New York Times – Op Ed by Casey Mulligan – 9 October 08

…There are two faulty assumptions here. First, saving America’s banks won’t save the economy. And second, the economy doesn’t really need saving. It’s stronger than we think…The non-financial sectors of our economy will not suffer much from even a prolonged banking crisis, because the general economic importance of banks has been highly exaggerated…

Fix the Credit Problem, Not its Symptoms – The Big Picture – Barry Ritholz – 10 October 08

…Why are markets reacting so negatively to a near $1 trillion bailout? The short answer is that the Federal Reserve and the Treasury Department have been focusing on the wrong issues. They have been treating falling asset prices-houses, stocks, bonds-as well as the lack of confidence between banks, as the actual issue. This is the wrong approach. Falling asset prices and a lack of confidence are a result of the underlying problem. You don’t cure alcoholism by getting rid of a hangover; you cannot resolve confidence issues by merely cutting rates…

International Trade Seizing Up Due to Banking Crisis (Updated) – Naked Capitalism - Yves Smith – 10 October 08

…the banking crisis is staring to bring international shipping to a halt…Not only are banks now leery of lending to each other for much longer than overnight, they are also starting to refuse to honor letters of credit from other banks…