The Insolvency Dilemma →
Add another notch to the board: Krugman makes the case for widespread insolvency in the troubled banks. He adds to a large number of voices – including my alma mater for my WikiPhD in Economics, Planet Money – who see things that way.
In opposition, of course, are Treasury and the White House, whose continued investment demonstrates their belief that the trouble lies in liquidity. And I find the logic there irresistible: look at the markets day to day - everyone is freaking out. Toxic assets aside (or even, to some extent, inclusive!), we have to be experience unprecedented illiquidity. Right?
Folks much smarter than me disagree, but I’ve yet to be swayed by a framing of the current climate in a way that supports their view. Treasury isn’t helping this much now, but if they can eventually inject confidence back into the system, it seems like assets good and bad are bound to recover a great deal of value. That’s liquidity.
