Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
No Return to Normal - James K. Galbraith
But the plumbing metaphor is misleading. Credit is not a flow. It is not something that can be forced downstream by clearing a pipe. Credit is a contract. It requires a borrower as well as a lender, a customer as well as a bank. And the borrower must meet two conditions. One is creditworthiness, meaning a secure income and, usually, a house with equity in it. Asset prices therefore matter. With a chronic oversupply of houses, prices fall, collateral disappears, and even if borrowers are willing they can't qualify for loans. The other requirement is a willingness to borrow, motivated by what Keynes called the "animal spirits" of entrepreneurial enthusiasm. In a slump, such optimism is scarce. Even if people have collateral, they want the security of cash. And it is precisely because they want cash that they will not deplete their reserves by plunking down a payment on a new car.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Carrie (migeru at eurotrib dot com) on Fri Mar 20th, 2009 at 05:37:14 AM EST
I am trying to gauge how this is playing out here in Switzerland. It seems to me that Switzerland follows after the US, in terms of policies and economic responses (this is just anecdotal, I have no empirical data to support this, but it seems this way from where I stand). For example, Switzerland is just now starting to see a real increase in unemployment. What is different here is that, for the most part, the local Swiss banks didn't play games with sub-prime mortgages - people still had to put down real money on their homes - so this problem is not here so much. But, people aren't spending money so freely now, so business is contracting.

I'm curious, what about in Spain? How is it looking there? And is the socialist government handling the recession well there, or are they going to get blamed for this?

"Once in awhile we get shown the light, in the strangest of places, if we look at it right" - Hunter/Garcia

by whataboutbob on Fri Mar 20th, 2009 at 06:01:42 AM EST
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