The problem is with the banking and insurance systems this time, and the problem it that they don’t trust each other enough to lend the money they have, as they know how corrupt and tenuous the system is.

The one important way in which Bernacki acted in exactly the same way as happened in the Great Depression was not speaking out when he realized the pathetic shape the financial system was in. There’s nothing wrong with yelling “Fire!” in a crowded theater when there is a fire.

We have never really recovered from the last recession, and when the GDP is as dependent on consumer spending as the US economy is, the lack of job growth and stagnant wages only require a spike in a necessity, like energy, to set things into a “flat spin”. House prices have dropped 30% down here but no one is buying. If they go any lower no one will bother to build, because the cost of materials makes it a losing proposition.

And even if they do decide to use the money as promised, they are too stupid to do much good anyway. Screwed either way IMHO. 🙂

Unfortunately, as I point out in my latest posting on my own blog, we still have at least a 30% drop in housing prices before the situation stabilizes. This is going to continue to play hell with GSE and bank balance sheets as all that money vaporizes out of the system. Bernanke has limited means of injecting new money into the system via the banking system, what he needs is a lot of government bonds to buy, which in turn allows him to inject capital via the bailout mechanism. This particular bailout bill, while far, far, far from ideal, at least gives him that. It’s not perfect. But the last thing you should do when the boat is taking on water is quit bailing because your current bail is a little leaky…

– Badtux the Economics Penguin