6 More Reasons to be Gloomy

Daniel Drezner is not uplifting. (But it is hard for me to disagree.)

1. Credit markets have yet to really unfreeze, because the underlying problem — putting a price on a lot of toxic debt — has yet to take place;

2. It’s going to take some time for trust — a vital public good — to return to global capital markets;

3. The crisis has done nothing to unwind the global macroeconomic imbalances that contributed to the asset bubble in the first place — if anything, the crisis has temporarily reinforced it;

4. There is a very dangerous prisoner’s dilemma game brewing in the interplay of fiscal expansion and trade policy. Unless export engines like Germany start to signal that they’ll prime their pump as well, you’re going to start to see some nasty protectionist attachments to any new government spending;

5. Fiscal expansions are going to take a long time to kick in, and the ones being proposed are not necessarily conducive to countercyclical boosts.

6. Beyond the fiscal expansion, this crisis is going to result in a lot more state intervention in the economy. Given what’s happened, it would be intellectually dishonest of me not to acknowledge that some of this intervention will be necessary. A lot of it, however, is going to be misguided and stunt long-term growth.