Left Flank

Take your pick of perspectives on today's financial meltdown eliminating two investment houses and an insurer, AIG: doom, opportunity, and optimism. Here's my choice:

MARGARET WARNER: Professor Rogoff, do you think it will be until 2010? Alan Greenspan said yesterday he thought -- he hoped the housing market would stabilize sometime in 2009. And that's what Paulson said today, too.

KENNETH ROGOFF: Well, I'd put a little bit of optimism after today in that they're at least admitting there's a problem. Until now, the government policy has been to lower interest rates, try to bail out a firm here and there, and think that somehow this is going to go away.

But the problem is our financial sector is bloated. There have been years of epic profits. They've become too big. They need to shrink. And the government can't support them all.

And by finally really acknowledging that this weekend, I mean, I think it's looking towards some healing. And I think we're certainly going to have a deeper recession as a result of this, but maybe we might come out a little faster.

On the other hand, I certainly don't think we'll be in good shape still by the middle of next year.

DIANE SWONK: Underscoring that, I just wanted to add, Japan never acknowledged its problems, and that's why they had over a decade, almost 15 years of problems. This is somewhat -- as hard as it is, at least realizing your problems is one step to solving them.

KENNETH ROGOFF: Absolutely.

The Economist adds gloom for measure, not its usual manner.

Even if markets can be stabilised this week, the pain is far from over—and could yet spread. Worldwide credit-related losses by financial institutions now top $500 billion, of which only $350 billion of equity has been replenished. This $150 billion gap, leveraged 14.5 times (the average gearing for the industry), translates to a $2 trillion reduction in liquidity. Hence the severe shortage of credit and predictions of worse to come.

Indeed, most analysts think that the deleveraging still has far to go. Some question how much has taken place. Bianco Research notes that while the credit positions of the 20 largest banks have fallen by $300 billion, to $1.3 trillion, since the Fed started its special lending facilities, the same amount has been financed by the Fed itself through these windows. In other words, instead of deleveraging, the banks have just shifted a chunk of their risk to the central bank. As spectacular as this weekend was, more drama is on the way.

It's going to be a long few years.

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