Financial Crises and Subprime Paper

Jim Hamilton at Econbrowser has an interesting post about financial crises.  He delves into some economic history, comments on the role of the Federal Reserve, and offers some implications for current mortgage difficulties–all this in just a few paragraphs.

His conclusion:

. . . insofar as we are talking about solvency problems, there is little the Fed is able to do to prevent those– some subprime mortgages are going to default, and that’s that. However, the Fed can and will prevent these from cascading into broader liquidity problems, by which I mean insolvencies created solely because of forced liquidation or unavailability of short-term credit.

My take is that Jim is probably right, but a financial crisis can add another straw to the proverbial camel.  If it’s the only straw, no problem.  But if the camel is already weighted down with tight money, high oil prices and a swing in business sentiment, then this straw just might break a back.

Business Strategy Implication:  Keep the recession threat in the slightly-yellow zone.  It’s not quite a green light for business, and definitely not a red light.