Muddling Through

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Do we need to take drastic action to save the American banking system? Or can we just let weak banks “muddle through,” using their operating profits to slowly but steadily improve their solvency over time? The latter was the Japanese approach, and Matt Yglesias points out today that there are some revisionist arguments going around that, actually, Japan didn’t do all that badly. So maybe muddling isn’t so bad after all.

Along the same lines, John Hempton once pointed out to me that Thailand followed the same approach after their currency crisis in 1997, and it worked fine.

Then again, Sweden and Norway needed massive intervention to save their banking system in the early 90s. Muddling wouldn’t have worked for them.

So it all depends. That’s not a very exciting conclusion, is it? But that’s life in the world of high finance. It’s just like Hollywood: nobody knows anything.