Provocative piece up earlier this week over on the (excellent) FT economistsâ€™ forum. Authored by Anders Aslund of the Peterson Institute, the piece takes people to task for stubbornly insisting that the current crisis could not end up being worse the the Depression. While it very likely wonâ€™t end up being worse than the Depression, taking it as an article of faith is over-rigid thinking that helps no-one.
Here are Aslundâ€™s points with respect to where the â€œwhy it could be worseâ€ risks lie. He is not saying it will be worse, just that the following represent some of the possible blind spots.
Defended exchange rates over-aggressively Floating exchange rates could lead to trade panic Allowed monetary supply to shrink dramatically Monetary expansion and budget deficits lead to currency collapses States did not go bankrupt States could go bankrupt, leading to hyperinflation Subprime loans existed, but market were simpler Deeper and more complex markets with connective tissue everywhere Emanated from two countries: US and Germany Coming from everywhere, i.e., with worst real estate bubbles in Moscow and Middle east Minimal over-leveraging of major financial institutions Massive over-leverage of major financial institutions Global trade was frozen in wave of protectionism Global trade freezing in credit contraction Relatively slow advance and loose coupling Fast advance and tight coupling via trade and global media