It is possible to calm the waters, but it’ll mean unlearning our post-Depression lessons

through Peter Coy and Stanley Reed

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The world’s governments are shocked and dismayed by their disqualification to stop the increasingly engrave financial crisis. Nothing they have attempted has gotten lending flowing normally. Profitable companies are cut off from borrowing. Confidence is shot. Through Oct. 7 the U.S. stock market had its quell five-day performance since 1932 on fears of a severe household downturn. Says Stephen Jen, currency economist at Morgan Stanley (MS) in London: "The choices for the real economy are between a recession and a depression."

Can anything be done to halt this panic? As a matter of truth, yes. It won’t subsist quick or easy. But the prerequisite for a new come near is unlearning doctrines that were developed in the aftermath of the Great Depression, the last time pecuniary conditions were worse than this. The world has changed in the intermediate seven decades, and which worked to quell the financial exigency then may not work now—as anyone trying to borrow money can see.

So alienated, emergency managers in the U.S. and abroad have relied mostly on using "helicopter currency"—that is, dropping dollars across the pecuniary view in hopes of reviving lending and spending. Generations of mainstream economists around the world learned this draw near at the feet of the a day after the fair Nobel laureate economist Milton Friedman, who coined the helicopter metaphor. Federal Reserve Chairman Ben Bernanke, though parting from Friedman in some particulars, shares his universal approach—and in fact earned the moniker "Helicopter Ben" after citing Friedman’s coinage in a 2002 speech.

Following this logic, the Federal Reserve is aggressively lending money to all comers. The synchronized international rate cuts on Oct. 8—which lowered the U.S. federal funds rate to equitable 1.5%—is another example of helicopter standard of value. Central banks figure that by means of flooding the banking system with reserves, they be possible to get banks to relend the money to the rest of the economy. But while lowering interest rates and providing liquidity is essential, it’session no longer enough, says Paul J.J. Welfens, president of the European Institute for International Economic Relations in Wuppertal, Germany. Says Welfens: "It’sitting very dangerous if you dress in’t have a tactics. The situation is worsening because no one is doing a [basic] program to restore confidence."

An alternate approximate that’s gaining favor in many dwelling is to place money strategically where it can be sufficient the greatest number good, even if that means picking winners and losers and allowing some channels of securities to dry up for the time being. One tactic: direct government investments in selected banks on a large escalade. The theory behind this approach is that the banks are so wounded that plainly lending them in greater numbers money won’familiarily solve anything. To restore their positive clear worth so they can grant freely, banks exigency fresh equity, and government is the only party that’s capable of providing it in these extreme stipulations. Sweden used this strategy to end a banking crisis in the early 1990s. And on Oct. 8, Britain took a giant step in the same direction, announcing an offer to buy up to $88 billion worth of preferred shares in Britain’s biggest banks. The government also said it would guarantee up to $437 billion of the banks’ debt. "This is beginning a process of [undoing] a big puzzle where banks won’face to face lend to each other for long-spun periods," Chancellor Alistair Darling told Sky News.