The real subtitle is "a failure to nationalize the banking system, if needed, will lead to the second great depression"
I have been mulling over the little fact, shown in Rogoff's paper, that equity recovery lagged economic recovery in banking led recessions in general and more particularly in the Great Depression. I have also been following the growing confusion in the inflation vs deflation debate.
I have been a deflationista since the beginning, even during last years oil spike because "inflation is always and everywhere a monetary phenomenon". If inflation is always and everywhere a monetary phenomenon then so is deflation. By monetary levels I mean M3+Debt, total money supply must include debt levels. Meaning FED money + bank leverage both regulated and unregulated (and here is where it all went poof). Unregulated debt equals unregulated money supply, and the invisible hand was just been mainlining lines of debt coke after lines of debt coke until it overdosed. There is a case to be made that the last 10 years of "prosperity" were largely fueled by money supply and velocity, not real economic value.
So the question, mathematically, simply becomes one of balance, can the FED replace enough debt to offset the drop in private debt and stabilize prices? The FED's first role is price stability. But the Fed can print all the money they want, if that money is not circulating, its velocity is zero and its anti-deflationary impact is zero. In that case, getting the banks to lend again requires nationalization. Plus it would make sure we avoid the, improbable, scenario of hyper-velocity post recession leading to hyper inflation.
Banking led recessions are nasty, as opposed to industry cyclical ones, because they affect monetary levels, both supply and velocity, they are external factors to any industry. This impacts the "real economy" over a period of 1-2 years. We are starting to see this hit wall street earnings. Those who think that the banking system can collapse disorderly without impact, are akin to people looking at a nuclear flash and thinking "oh it is just over there". Wait for the physical wave, it's coming and it is the second wave that destroys everything. A disorderly (too rapid, chaotic, random) collapse will trigger the second great depression just as sure as a disorderly liquidation of banks plunged the US and the world in the first one.
Until the banks get back on their feet, which means until the housing situation is sorted out, there is no way OUT of the current recession, period. The FED cannot spend its way out fast enough. Roubini talks about USD 4T in the banks alone. Again in that case swift nationalization of the banking system is the only way. If the banks, structurally cannot fulfill the socially necessary lender role then it must be nationalized and the government must assume the role of lender of last resort and distribute through existing skeletons of banks. This is monetary keynes, if there is such a thing.
And finally there is the link to the equities lagging economic recovery that i was looking for. In banking led recessions equities lag economy precisely because it is banking led and the usual leverage doesn't apply. Also the gold standard was in place. So equity recovery was purely a function of economic recovery, not one of monetary levels. In this current fiat case, one may make the case that Dow 8000, and stable, is a sign of partial success of QE and a sign that they are printing money fast enough to avoid the disorderly liquidation of the banking system.
But triage it needs and triage there will be. That triage is either orderly by itself, or we need to nationalize swiftly. A disorderly collapse will trigger the second great depression by continuing the downward spiral of depressed money levels both supply and velocity which will result in massive deflation.