Why The Recession /Depression?

John Higgins of Capital Economics offers his analysis of why this is happening:

If policymakers think that adding extra liquidity is going to solve the credit crunch on its own, they are going to be sorely disappointed. This is because upward pressure on interbank rates is a consequence, not a cause, of the crisis.

It is a shortfall of bank capital that has made financial institutions reluctant to lend to one another. Boosting liquidity is therefore only a necessary, but not a sufficient, condition for stabilising the financial sector. In fact, until banks are adequately recapitalised, funding
pressures may even get worse.

This also explains why the markets’ reaction to the passage of the Emergency Economic Stabilization Act (EESA) has been so lukewarm. Bank capital will only get a lift from the $700 billion “troubled asset relief program” if the authorities overpay for the assets they buy.”

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John Higgins is Capital Economics’ Senior Market Economist with 15 years of experience in financial markets as a trader, analyst and economist. John is tasked with identifying value in global asset markets based on our macroeconomic and policy projections. He contributes to and edits our Capital Daily and is responsible for producing regular updates and thematic pieces on key market developments.

John joined the company in 2008 from Stone & McCarthy Research Associates, where he was Senior Economist covering the euro area. Previously John worked at Nomura International plc in London, where he was Head of Economic and Credit Research within the fixed income division. John has considerable experience presenting at conferences and seminars, and speaking with the media. He holds a degree from Exeter University.