Tuesday, December 9, 2008

Confidence in institutions

One of the ways that a depression is different from a garden-variety recession is that confidence in formerly rock-solid institutions gets so badly shaken that they crumble and need to be replaced with wholly new institutions. In a recession, most of the institutions remain at least relatively solid and it is merely the overall level of economic activity that is the major concern.

So, where are we now?

Well, we have certainly seen a hefty amount of shaken confidence in our banks, Wall Street, the value of housing, and a President-elect being chosen after running on a platform of radical "change" in how Washington does business.

Still, despite the hits to confidence, there is still a strong level of confidence in many of our public institutions.

Sure, we had a couple of bank runs and even runs on money market funds, and sure, the Federal Reserve, Treasury, and FDIC, were forced to dramatically shore up the financial system, but the original institutional structure does still stand, and it stands with a renewed level of confidence. Sure, the sytem could have collapsed, but the point is that a collapse was averted.

Sure, people do really want to see "change" in Washington, but they want some change and they want "smart" change, but not an outright revolution.

With all that has happened, the net effect is that we are seeing incremental, evolutionary changes, but not a wholesale, clean-slate revolution. The Great Depression ushered in the New Deal, but we are merely enhancing a lot of those same institutions.

Sure, Wall Street investment banks have vanished as a breed, technically, but in reality they have simply moved under the umbrella of the banking system overseen by the Federal Reserve. Yes, this says that the current episode is much worse than a garden-variety recession, but still not quite to the level of a depression.

There is still plenty of time for further financial and economic problems to develop, but the question will remain whether we see the kind of undermining of confidence in institutions that would be expected in a true depression where institutions completely fail on a widespread scale.

In short, we are not yet "there", but it remains technically possible that we could still stumble into a depression.

-- Jack Krupansky


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