Over at Marginal Revolution Alexand Tyler are engaged in an interesting discussion on the theory and empirics of the credit crunch. I find Alex's arguments to be the more persuasive. How about you?
Also, Anna Schwartz continues to provide important insights into this mess. She has argued that unfortunately the Fed and the Treasury have acted as if the only lesson to be learned from the Great Depression is the lack of liquidity lesson, which she argues is not the relevant lesson. She also used an interesting argument about how the attempt to recapitalize the banks is doomed to failure because we are trying to recapitalize insolvent banks, when only the solvent banks are the only institutions capable of using the funds correctly. This is similar to the arguments and data we found in relation to foreign aid --- only those countries that already had good institutions were the countries that could use foreign aid productively, countries where the institutions are bad, foreign aid just goes into a black hole. But, of course, the countries with good institutions do not require foreign aid because they are already receiving foreign direct investment. Schwartz's argument applied to the banks reinforces why the bailout and recapitalization policies we are following are counter-productive. But they no doubt make politicians feel better because they are at least doing something, even if that something is the wrong thing to do!