Economists stuck behind the financial lens

Economists suffer financial illusion, the idea that sudden changes must appear through the financial system. Actually it is just the opposite, sudden changes occur because they bypass the financial system. From Martin Wolf's blog here is a post from James Park. He says:

"In October 2008, the flow of money stopped. As Lehman Brothers teetered on bankruptcy, the US financial system went into septic shock - from toxic assets representing worthless derivatives and collateralised debt obligations. To capture the gravity of the situation, the media latched onto metaphors. Warren Buffett called that October the economic equivalent of a Pearl Harbor.

While Buffet’s martial analogy serves to highlight the fall in the inter-institutional lending, a more apropos analogy is that the financial system found itself in the intensive care unit with the diagnosis of septic shock.

...

Returning to the cascade of events following the demise of Lehman Brothers, money flow did come to a stop as the financial pipes became so enlarged by a lack of inter-institutional trust. In the name of self-interest, banks decided it was better to shut down the flow of money and keep their own pool of funds. This decreased perfusion of money on Wall Street transferred over to Main Street as the main organs of America, the Mom and Pop businesses and individuals, became starved of oxygen money triggering a negative feedback cycle: a recession."

My Take:

First things first. On July 25, 2008, the date of onset, retailers knew something was up and begin to take action even before Lehman Brothers knew what was up. The week before, consumers simply quit driving their cars to the store, it is that simple. Retailers began their planned deflation before informing their creditors. By the time Lehman revealed the problem, the deflation had been underway for two months.

I have an actual witness to the depression event, a friend of mine who commuted every day on his scooter. This untrained economist, scooter rider delivered to me the news that the depression had started on the week of July 16, even before the retailers understood. He detected the depression by the swarm of cars parked in front of all the homes he passed on the way to work.