Governor gloom and professor boom

Mervyn King, the governor of the Bank of England, did not say anything path-breaking in his speech in Leeds yesterday. Its importance lies more in giving official endorsement to opinions that are already becoming pervasive.
It was already widely accepted that “the banking crisis dealt a severe blow to the availability of credit” and “the UK economy is entering a recession”. Few would disagree that “the outlook is obviously very uncertain”.
Some of the more striking things he said had an apologetic character to them – they seemed to be at least partly designed to justify the Bank’s actions in recent weeks. He said the British banking system was at its closest to collapse since the first world war. In addition, he argued the problem it was facing was one of solvency rather than merely liquidity.
More interesting are recent articles by Casey Mulligan, a professor of economics at the University of Chicago. He argues that, despite the recent financial volatility, American economic fundamentals are relatively strong.
A key part of his argument, outlined in an article in the New York Times, is that America’s marginal product of capital – that is the amount of profit for each dollar invested – is relatively high. He also points out some important differences between now and the Great Depression of the 1930s.
Mulligan may not be right in all his arguments but he seems to be asking the right questions.