Take a deep breath

...and read this article. The upshot is that despite the 'financial meltdown' on Wall Street, there is not a huge body of evidence that the wider world of banks are failing or have reined in lending.

"The most recent Federal Reserve data show that the volume of outstanding bank loans declined 0.5 percent from the last week of August to the second week of September, though it was up more than 6 percent from the corresponding time last year."

Almost exactly one year ago, the subprime meltdown started. Since then, banks have been in so much trouble that total outstanding bank loans have.....gone up by 6%. This is not a sign of the apocalypse. Could bank lending have been higher? Probably, but it is not contracting dramatically (as it did during the Depression).

There is a part of me that wonders whether the drama surrounding the Wall Street investment banks is something that has fewer ties into the rest of the economy than they would have you believe.

Here would be a simple explanation of what I mean. Let's say that Kirstin and I have made a series of loans to each other (I loaned her $50 for a mani/pedi, and she loaned me $50 for beer and steaks, and so on). We've each built up huge piles of debt (I owe Kirstin the $50) and huge piles of assets (Kirstin owes me $50). On paper, we could generate billions (like, say, $700 billion) in offsetting assets and liabilities to each other. Now let's say that I "fail", or might "fail". All of the sudden I can't make my loan payments to Kirstin (why? partially because she can't pay me all of the sudden). We have billions in value on our books - we're too big to fail! But if we go down, who and what do we take with us? Nothing.

Part of me wonders whether the current crisis is not just a crisis of Wall Street, at least in large part, and we are overselling the ramifications. I think one approach to understand this would be for the government to require that all the investment banks reveal their balance sheets to the public. Let investors and other banks see precisely what they have on the books. Then we can understand how important their failure actually will be.

Maybe they'll already done this, and shown the Fed and the Treasury their books. In that case, Bernanke and Paulson know a lot more than anyone else and are judging the crisis correctly.