I find it doubtful that anything can be done to prevent this from happening all we can do now is to be prepared.
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And Now the Great Depression
Barry Eichengreen](http://www.rgemonitor.com/latam-monitor/bio/548/barry_eichengreen)** | Sep 23, 2008**
A couple of months ago at lunch with a respected Fed watcher, I asked, “What are the odds are that U.S. unemployment will reach 10 per cent before the crisis is over?” “Zero,” he responded, in an admirable display of confidence. Watchers tending to internalize the outlook of the watched, I took this as reflecting opinion within the U.S. central bank. We may have been in the throes of the most serious credit crisis since the Great Depression, but nothing resembling the Depression itself, when U.S. unemployment topped out at 25 per cent, was even remotely possible. The Fed and Treasury were on the case. U.S. economic fundamentals were strong. Comparisons with the 1930s were overdrawn.
The events of the last week have shattered such complacency. The 3 month treasury yield has fallen to “virtual zero” for the first time since the flight to safety following the outbreak of World War II. The Ted Spread, the difference between borrowing for 3 months on the interbank market and holding three month treasuries, ballooned at one point to five full percentage points. Interbank lending is dead in its tracks. The entire U.S. investment banking industry has been vaporized.
And we are in for more turbulence. The Paulson Plan, whatever its final form, will not bring this upheaval to an early end. The consequences are clearly spreading from Wall Street to Main Street. The recent performance of nonfinancial stocks indicates that investors are well aware of the fact.
So comparisons with the Great Depression, which have been of academic interest but little practical relevance, take on new salience. Which ones have content, and which are mainly useful for headline writers?
**First, the Fed now, like the Fed in the 1930s, is very much groping in the dark. Every financial crisis is different, and this one is no exception. It is hard to avoid concluding that the Fed erred disastrously when deciding that Lehman Bros. could safely be allowed to fail. It did not adequately understand the repercussions for other institutions of allowing a primary dealer to go under. It failed to fully appreciate the implications for AIG’s credit default swaps. It failed to understand that its own actions were bringing us to the brink of financial Armageddon. **
Excerpt, I wouldn’t read the rest here if you have a weak stomach: http://www.rgemonitor.com/latam-monitor/253725/and_now_the_great_depression
