Friday, February 15, 2008

Confidence and credit, 1930-style

Paul Krugman compares the current crisis in lending spurred by the crumbling subprime real estate market to what happened during the Great Depression, minus the photogenic lines of people trying to withdraw their cash from banks.

As he implied, the good news is that this time, the Federal Reserve is actively trying to keep credit from drying up, rather than wring the bad loans out of the system. In 1930 and 31, the big mistake was allowing the entire banking system to pay for the mistakes of a few.