Humpty-Dumpty theories

One version of pessimism is to wonder how easily a banking system can be put back together again.  Just as a physical bubble is an asymmetric process (it is easier to pop one than to rebuild it), maybe a banking system is similar.  It’s built up over time by lots of lattice work and investment in complementary processes and assets.  Once it pops away it can’t be easily reconstructed, even if the reconstruction plan targets the initial cause of the problem (low capitalization).  One implication of this view is that initial recapitalization of banks — say about a year ago –was a much more urgent matter than we realized at the time.

A more optimistic take is the "bounce" view: things have to fall far enough so that they hit the floor and get a bounce, pushing them back up again.

In the last two days I have started to entertain the possibility that the Humpty-Dumpty view is in fact correct.


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