At the moment, I am not certain how things will go. There are two possibilities. - The actions of the political and monetary authorities might be effective. Sometimes the wrong solutions are effective for a while, even if it stores up problems for the future. The capital injections of central banks may be enough to unclog the banking system. Collapsing gasoline prices and declining mortgage interest rates might make households feel confident enough to take out their wallets and start spending again. The world economy might respond by changing up a gear and moving slowly back into growth mode.
- Government policies might fail. Unemployment could surge upward meaning that more and more households are unable to make their mortgage payments. An increasing number of mortgagee sales could cause house prices to collapse even further. More toxic bank debt might be exposed causing the banking system to implode. A big wind down in consumer spending could bring business activity crashing to a halt. These effects could join together in a vicious circle of decline.
The political and financial authorities hope that the first option will prevail, but they cannot be certain.
One outcome is certain. The credit crash will lead to an immense increase in state power. Huge losses in personal and economic freedom will be welcomed throughout the world by people who want to be rescued from troubles.
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