Yes, it's primarily due to events moving too fast for lawmakers to respond (maybe close the markets for a day or two?); it wasn't too long ago that the Paulson plan was passed that was supposed to fix all this. And since events are happening more quickly and dramatically than foreseen, it encourages a bunker mentality.

Also, some of the short-term measures needed would be very unpopular and have possible long-term negative externalities. An example of this is Germany not wanting an EU-wide bailout, because they don't want to be paying for the mistakes over time of the less-productive EU states. Of course, if in the short term, all their banks go under, the long term may not matter much.

Schadenfreude!

World War Z is the right choice at this time. If we cannot handle a simple economic crisis, how will we handle the inevitable Zombie outbreak and possible pandemic?

I'm buying stock in Remington, Colt, S&W, Beretta and Kimberly-Clark. If this keeps up much longer everyone will be buying guns and toilet paper.

The audiobook for the Brooks lists "Rob Reiner as 'The Whacko'", a marvelous string of five words. I loved the book, but am considering buying the audiobook (abridged, sadly) just to hear it performed by a strong cast.

I agree... WWZ is by far the best choice... it provides a useful reminder that things can always get worse... don't forget to add whiskey to the toilet paper and guns shopping list...

Your breakdown of reasons is the best explanation I have heard thusfar, however I would add that to some degree events have moved not only too fast, but also beyond the control of the central planners. Maybe there just really isn't anything that they can do that would be effective without causing long term problems.

"1) 50% due to events moving more quickly than policymakers can at this point;"
2) 15% due to many of the policymakers themselves being too unpopular or lame duck-y to have much room to maneuver;
3) 10% due to myriad other actors too busy exulting in schadenfreude to realize that they’re going to go down with the ship as well;
4) 25% due to a lack of complete understanding of what exactly is going on.

I think points 1 and 4 have a lot of merit to them. #2 is demonstrable nonsense - Bush and Gordon Brown are the only lame ducks in sight, and the US and UK have been the most fast-acting and effective respondents to date, so clearly their lame-duckyness have not been a problem. I would argue otherwise - approaching elections and voter psychology have made German leadership the least effective among the major economic powers, while the French president (neither a lame duck nor facing elections soon) has been effective also. I'm not in a position to judge the leadership in China or the various sovereign wealth funds and Russian policy I simply don't get at all except from a Cold War era military-strategic perspective.

Point 3 can explain the late start that continental europe got in reacting to the crisis, but that was so last week! I think the failed rescues and re-rescues of Fortis and Hypo Real Estate have stripped off any schadenfreude with industrial cleaners in record time.

I think there is a heavy psychological and even physical component to the delay the measures beginning to work. The situation has been moving too fast for even an experienced banker to take it all in - really for anyone.

The other thing which is going on is that the banks are sucking in all this cash that governments are throwing at them - but not lending it out. I think this is because they believe liquidity is the only thing which will save them. They are also concerned for customers but personal survival comes first with them (as with any one) and that is still in doubt. It takes a great deal of courage to take a deep breath and lend in this environment. It's no coincidence that Wells Fargo was able to take over Wachovia this week - it is the soundest of the big US banks and has the backing of Warren Buffett, who is sitting on a huge pile of cash. Wells is probably an island of relative calm in the banking sector - and it shows in their judgment.

Most other banks are in a more parlous state. Their executives are tired, probably not getting a full night's sleep, nerves shattered, etc. In this situation it's not surprising they become very risk-averse and refuse to lend.

So when does the bank panic end? Any day now, I think. When the solvent banks realize that their world isn't coming to an end, that the blitz of liquidity and investment capital available is going to keep the system and solvent banks afloat, and that insolvent banks will be wound down in an orderly manner, they will go home and get a good nights sleep - and resume some lending. After a little while, some more lending, etc.

This won't stop the stock market fall of course, but bank lending will help there also. At some point cashed out buyer will realize that values are absurdly low and begin buying back in - and that will be the end of that crash.

After that we'll probably have a recession to deal with, but the remedies for that we do know.

Dan, how much time to you spend reading, and when do you actually do it (seriously)? I'd like to read more, but I can't imagine reading as much as you do...

How much will the LEH CDS auction add to the Financial Meltdown?

"Those who wrote $400 billion plus of protection on Lehman's credit default swaps had been expected to make a substantial payout in the 80% to 85% of face value range, but the preliminary auction showed even worse results."

(Taken from http://www.nakedcapitalism.com/2008/10/initial-lehman-cds-auction-90-cents-on.html)

Haven't the gummint actions taken so far made things worse?

Maybe there's no unified action because nobody trusts the one natural leader on this subject.

I'm too busy stocking up the bunker to post a meaningful comment...

But if I did, I'd say that you apportion it about right. Things are transpiring so rapidly that we really have no idea what to do, or even what the real problem is.

I'm reminded of one of the problems at the outbreak of the Great Depression: the lack of a lender of last resort. Since that time, the US, sometimes on its own, sometimes acting in concert with others through the IMF and World Bank, acted as the lender of last resort. In the '90s this helped during Mexico's crisis, the Asian Financial crisis, and other incidents (Argentina, to an extent). But what happens when the lender of last resort proposes a $700 billion dollar bailout and we experience such volatility? Bunker time it is.

Ok, not really. I am worried, especially as the more I read the more I am convinced no one has a full handle on what is going on or why it is occurring.

Credit markets frozen, nations going bankrupt. The only way to fix this is to have ask the aliens that control Mars' banking system to inject capital into our global economy. Maybe we can let them skin the Congressional Democrats in trade. They are obviously to blame.

Me, I am reading escapist fiction. (And no, i am not talking about Sara Palin's latest speech). I'd rather let Hercule Poirot use his little grey cells to catch some murdering cad, than fry my grey cells wondering whether the market is up, down, or the credit market is freezing, or melting like a wicked witch.

I'm with #14, but I'm not #12, though I am of the same mind as the other Eric.

(1) Nobody seems to have a clue, except "its Bad".

(2) I'm flying abroad in 10 days. Will my ATM, credit cards, and cash function, or will I be stuck? The fact that I'm seriously wondering about this says something.

(3) Escapism seems the perfect genre now, that and storing lots and lots of canned food.

(4) This whole thing is so odd. Things are falling apart because of feelings about numbers in a bunch of databases combined with some financial algorithms. These very abstract constructs are leading to a screeching halt to so much economic activity.

The vast majority of the money in question was aways just numbers in databases, and never more real than that. That's what is so strange about this. It's all so intangible and abstract. It's not like an asteroid hit New York and we can point to some big smoking crater to see why things are so broken.

Weird how lives can be disrupted and entire nations ruined over nothing more than the patterns of electrons in some financial IT system...

So where are you escaping to, Eric #15? Iceland? I hear it's nice, though a diet of mutton and fish mght get a bit repetitive after a while. ;)

If you're going to Europe you might want to pack your shirt with the maple leaf or buy a maple leaf decal to stick to the old backpack. I assume you're leaving your American flag shirt at home, assuming you have one.

God, let me never be as ashamed as Don Stadler is of my own country.

Maple leaf huh ? If Canada sets up more kangaroo "Human Rights" courts that try to suppress freedom of speech, it is the maple leaf that is going to start look bad. And i say this as some one who likes Canada.

Ashamed, NS? Not hardly. The target of that comment wasn't good old Uncle. The Leaf is a common dodge for a certain kind of person, but for real shamelessness it's very hard to outdo certain Europeans.... IMHO, anyway.

Don Stadler,
My apologies - i quite did'nt get the "assuming you have one" quote at the end of your piece.

btw, iam not American but i am saddened by how many Americans seem to think so little/are ashamed of their own country. This country isnt perfect, but it still is America.

I ENTIRELY agree with you on the shamelessness of a few Europeans. It's sad - their imperial nature and haughtiness is some thing that wont ever change.

There was a sense of schadenfreude among some Europeans about the financial turmoil until it became clear that the financial crisis is global and not just restricted to America alone.

http://www.thelocal.de/14569/20080928/

The 'shame' you are referring to is a passive-agressive tactic of certain US lefties, but by no means all or even most left-wingers. It's also a college-student thing; but most of them will grow out of it once they get over discovering that the US is not perfect after all.

Among adults it's really more of a Hollywood thing and perhaps in certain extreme groups of academics than anyone else, I think. The lefty I know best is doing her best to change thing and to help certain people she finds worthy. I think that shows a certain nobility - even if I don't agree with her about many things.

It looks like they'll be getting their chance this year - we'll see how well they do. I love my country and am generally proud of it. Not proud about everything but not 'shamed'.

Actually, I am only flying off for a conference in Cyprus. I just want to be sure I will be able to make it home. I'm not into pretending Canadianness, and I have found reflexive anti-American views lame, hypocritical, and self-serving. I just don't want to be stuck abroad, with no working credit or currency. Reading about grain piling up in ports for lack of credit makes me wonder about travel now. Like should I carry gold coins or pieces of eight?

It would help if Paulson, who appears to have about the level of activity of a hibernating bear, would actually get on it and start implementing the bailout -- especially as Congress gave him the tool he really needed but didn't ask for, which is to recapitalize banks by taking voting equity stakes in them. It doesn't do any good to just sit around talking about it.

If Paulson thinks government by press release is adequate, maybe he should take a look at Illinois under Blagojevich. It ain't pretty.

"If Paulson thinks government by press release is adequate, maybe he should take a look at Illinois under Blagojevich. It ain’t pretty."
Funny stuff ! Blago does not have much of a public presence since the Rezko trial started. From some Sun times reports it now seems Rezko is starting to sing.

may be thats why Rod-B is keeping a low profile.

Actually, I found something to put at the top of my financial-collapse reading list.

New York Times Op-ed

This is all the fault of computers taking over the world of finance! (Actually it's pretty thought provoking, and illustrates why this is so difficult for policy makers, because the sheer complexity of this is literally mind-boggling).

I suppose if we need a scapegoat, I'd prefer angry mobs with pitchforks wanting to lynch Sun servers and torch data centers. It's much better then the depressingly usual scenario of mob violence on more traditional scapegoats (Jews, "outsiders", etc.).

Eric, vis #24. I don't think it's so much that computers are taking over the world as much as that we've allowed them to take over. There has been a distinct lack of inserting human judgement into the system, and certainly a lack of building survivability into the system.

The 'Gods of the Copybook Headings' have taken over for now. Don't blame 'computer geeks' as much as look into which 'computer geeks' were in charge. It is a profession which tends to eat it's own, and the older 'geeks' find it hard to survive. The rational effect of this trend has been that 'more risk' wins out over 'more safety' almost every time. That has worked in the ascendency of young 'quant-jocks' over old bond-traders as well.

The problem with the CDO's and swaps is tht they have been designed to work in balancing off risks '99% of the time'. So now they are learning a fundamntal truth of statistics - that '99% confidence' works 99% of the time, but that 1% when it doesn't can bankrupt you with startling swiftness.

Another thing we seem to be learning is that - information is good. Transparency is good. Fair trading rules are good. The US is down 38% this year, a horrifying drop. But among the world's major stock exchanges it has performed 3rd best this year behind Israel (30% drop) and Switzerland (35%). Malaysia and Japan have dropped 39%. Every other major market has dropped 40% or more!

China, Russia, Brazil, and India have declined 57%, 65%, 55%, and 58% respectively. I suspect money has fled some of these places because nobody really knows what is going on underneath the covers in places like China and Russia. Whether banks are bankrupt, whether Putin will reach out and force foreign shareholders out, things like that. Major European countries are also harder hit (France and UK down 47&, Germany 49%, Italy 51%, Spain 44% because US authorities have been seen to react with greater swiftness to the crisis. And perhaps because US banks have been required to be more open.

http://norris.blogs.nytimes.com/2008/10/10/no-shelter-in-this-storm/

"Dan, how much time to you spend reading, and when do you actually do it (seriously)? I’d like to read more, but I can’t imagine reading as much as you do…"

Who says he reads it all?

A couple of decades ago, when I still worked in biochem research, we used to joke:

"Have you read the new paper by X?"

Proud reply: "No, but I've photocopied it!"

With the implication that photocopying is as good as reading. Now we'd have to update the joke:

Proud reply: "No, but I've linked to it!"

[...] Great Depression, international finance, Megan McArdle, reading, recommended reading trackback Dan Drezner and Megan McArdle give some indispensable recommended readings on the financial crisis, relevant [...]

To understand this fiasco you need Mel Brooks, not Max.

So right, Mike

"Springtime for Paulson"

("Do you see this? I'm wearing a CARDBOARD BELT!")

Over here it's "Springtime for Gordon, and RBS. Winter for Lehman and AIG"