Half of US Banks Bust?

Count Andy Beal among those skeptical about Geithner's PPIP. According to Beal

He says Treasury Secretary Timothy Geithner's new plan to guarantee loans to buyers of toxic assets won't lead to many sales because the problem isn't liquidity but price. They are not low enough. Half the country's banks--4,000 in all--would be bust, he says, if they marked their loans to what the loans would fetch in an auction. He says banks are fooling themselves by refusing to mark busted assets down.

"Banks are on a prayer mission that somehow prices will come back and they won't have to face reality," Beal says. And that reality, according to Beal, is going to get a lot worse. "Unemployment is going over 10%, commercial real estate hasn't even begun collapsing and corporate credit defaults are just getting started," he says. His prediction: depression, without bread lines this time, thanks to the government safety net, but with equal cost to society.

Whose judgment do you trust on whether this is a crisis of solvency or liquidity: a banker who noticed all the bad loans being made as this crisis developed, or a regulator who failed to diagnose the problem?

And Now Some Bad News: Grim Employment Data

Another bad month. 663,000 more lost jobs. Unemployment at 8.5%. U-6 - unemployed, underemployed and the discouraged at 15.6%. Robert Reich makes it official: this is a depression.

Contrary Indicator?

Jim Cramer thinks our mini-depression is over (but not the recession). He sees us in a cyclical rather than secular downturn, due to the supposed positive impact of the Geithner plan.

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Robert Barro: Stock Market Crashes Are Bad

So get this: stock market crashes are bad. Don't believe me? Well don't take my word for it - listen to Harvard professor Robert Barro, who recently studied the correlation between stock market crashes and depressions (defined as at least a 10% drop in GDP or consumption). Barro's conclusion:

In the end, we learned two things. Periods without stock-market crashes are very safe, in the sense that depressions are extremely unlikely. However, periods experiencing stock-market crashes, such as 2008-09 in U.S., represent a serious threat.

I'm glad Robert Barro is here to tell us these things. Really, I am. But here's a tip: his study might actually be meaningful if he included debt levels as a variable. Debt deflation - a d-process - is the real culprit when it comes to depressions. As Irving Fisher described, when assets used as collateral for loans undergo price deflation, economies can fall into a downward spiral of deleveraging, leading to further falls in asset prices, and then even more deleveraging, as the two processes feed on each other in a negative feedback loop. I suspect if Barro redid his study and considered debt levels as well that the odds of today's crisis spiraling down into a depression would be significantly higher than the 20% figure he gave. I doubt he would compare our current situation to the crashes in 1974 and 2001. What does it say about the state of academic economics that "stock market crashes are bad" passes for insight from a professor at our nation's top university? Dark Ages, indeed.