"The real problem with the economy is that long accepted patterns of cross-border technology transfer, trade, and finance are simply unsustainable."
Ben Bernanke, the chairman of the Federal Reserve supports that: "at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets"
On Oct. 20, Paulson went further, explaining the bank recapitalization program this way: "Our purpose is to increase confidence in our banks and increase the confidence of our banks so that they will deploy, not hoard, their capital. And we expect them to do so, as increased confidence will lead to increased lending."
The implication of the Bernanke-Paulson view is that the underlying economic system is fundamentally sound, so that restoring trust in the financial system will put us back on a growth course. From that perspective, the infusion of massive amounts of capital into banks, which replaces the money lost in bad mortgages, will enable lending to begin again. Once investors see that all is well, then they will cease their irrational behavior, and start putting money back into stock markets and companies around the world.
However, what if the Bernanke view is wrong? What if financial stress is a symptom, not a cause?
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