Crisis may make 1929 look a ‘walk in the park’
This piece from The London Telegraph’s ace reporter/commentator Ambrose Evans-Pritchard will do nothing to calm your economic nerves, but then again, it looks more and more like it’s time to be as alarmed as we have sense to be. This is only the latest in a series of unsettling observations on the current state of the financial system.

As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world’s central banks are fighting the wrong war, and perhaps risk a policy error of epochal proportions.

“Liquidity doesn’t do anything in this situation,” says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression. “It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue,” she adds.

But wait…there’s more:

York (UK) professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster. “The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard,” he says. “They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don’t think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park,” he adds.

and more:

“The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history,” says Thomas Jordan, a Swiss central bank governor.

Not only is this article well worth noting…the accompanying comments in the Telegraph are too. This one, unfortunately seems to succinctly summarize the situation:

“The Central Bank’s choices are simple: let the banks fail or let the money fail. A US 1929 style depression or a German 1922 style hyperinflation.”

Merry Christmas!