Paul Krugman is Scared

Meltdown in housing bubble as buyers disappearing. Two large cash injections by Fed already today to stop the market collapse. Now three.

But when liquidity dries up, the normal tools of policy lose much of their effectiveness. Reducing the cost of money doesn’t do much for borrowers if nobody is willing to make loans. Ensuring that banks have plenty of cash doesn’t do much if the cash stays in the banks’ vaults.

Added: Even Second Life has had a run on a virtual bank.

Texas Kaos discussion.

Brad DeLong - not the problems the Fed was meant to solve. Intellectually stimulating. Fed buying mortgages!?

WSJ blog - economists react to frenzy.

Radicals - LaRouche - "the tip of the iceberg." World Socialist Website - A surprisingly informed wrap-up.

The Underlying Fear - Danielle Reed - Dow Jones/Associated Press - the worst is yet to come as many new homebuyers will get "hammered" this year and next.

Tags: Paul Krugman, economy, collapse, banks, funds, housing