Source: The Diane Rehm Show

With the global financial crisis continuing to accelerate, Albert Keidel joined a panel of experts on the Diane Rehm Show to discuss how the current situation arose and what can be done to move forward.  He argued that low interest rates are not as important as they are often made out to be.  When credit is frozen the way it is now, they may help banks borrow from the Federal Reserve, but they will not significantly change the rates at which banks lend to each other or influence who buys paper from the commercial market.  Keidel noted that the Fed is taking unprecedented steps to buy commercial paper on a very large scale.

The United States is witnessing, at least temporarily, the collapse of effective liquidity for the complex financial instruments that have long been used to underpin transactions.  For that reason, it is dubious to state that enough money has been injected into the credit market.  It is also misleading to look at current price/earnings ratios to assess what the true bottom of this crisis is.  The real potential crisis, he believes, is a Keynesian downward spiral, whereby declining consumption and declining investment reinforce each other. 

Keidel noted that China, Japan, and India are faring better than most economies amidst the current global turmoil.  It remains to be seen how smaller Asian economies will fare in the face of exchange rate pressures since they do not have strong mechanisms for handling capital flight. 

There are precedents for solving credit crises, but developed countries are not accustomed to having to resort to  using them.  The U.S. government needs to take over failing banks, fix them, and resell them.  The presidential candidates should not be stressing budgetary responsibility.  Keidel maintains that America will have to engage in major deficit spending, just as it has during every serious downturn. 
 

Click here to listen to Albert Keidel on the Diane Rehm Show.