Based on the latest economic data, all of the G20 government credit programs have succeeded in slowing down, if not halting, the decline in GNP brought about by the credit crisis. As a result, Paul Volcker felt comfortable telling Bloomberg News that the economies of the world have now stabilized.
In addition, the Wall Street Journal is writing articles saying that 13 of the largest 19 banks will pass their stress test and be free to repay the TARP preferred stock investment.
With all this good news, how come nobody is saying the credit crisis has ended? The reason is that all of the government credit programs are still in place.
I like to make an analogy between these programs and a heart/lung machine. The role of the heart/lung machine is to temporarily provide a patient's heart and lungs function while a surgeon fixes a problem with the patient's heart. Like a heart/lung machine, the credit programs effectively bypass the frozen credit markets.
Now, there are two major issues that need to be addressed. The first issue is what should the financial system look like when the credit programs are removed. The second issue is how and when should the government credit programs be removed.
