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Meddling in haste, stagnating at leisure
First of all, Wolf has it backward: The folks opposed to liquidation, not those who favor it, are the ones who "fail to understand the risks."The former cannot comprehend that in avoiding the risks of liquidation, they're asking for a version of what has transpired in Tokyo for the past two decades -- whereby the Japanese, in refusing to take the pain created by their real-estate and credit bubble, ensured the aftermath would be much worse and take much longer to recover from. (Not least of their mistakes: the unintended consequence of absurdly low interest rates in Japan, where chaos ensued as the domestic scramble for yield and the global spree of low-interest borrowing in yen went awry.)
Second, those of us who think liquidation needs to take place are not arguing that it's the solution. There is no solution (except to prevent bubbles from starting). Anyone who thinks otherwise does not understand the nature of the problem -- or capitalism, for that matter.
Only in a crisis can we have any hope of generating the political will to begin pursuing sensible policies. But thus far in our current financial crisis, there's been little indication of interest in pursuing sound long-term policies. It's been more about political expediency and ameliorating pain in the short run.
However, as the example of Japan demonstrates, the pain will be far worse and will last far longer if the government continues to try to force various markets (such as housing) to trade at prices it deems appropriate, rather than allowing markets to trade where they need to trade.
Our current economic and financial turmoil can't be "fixed" -- that is, we will not see a quick return to prosperity. But if we have the willpower, our problems can be dealt with -- in that it is possible to reshape our priorities to return us over time to a productive and financially prudent country.
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