A Generation Of Destruction.(Global Investor)(stimulus programs for banking industry)

Byline: Barton Biggs; Biggs is managing partner at Traxis Partners hedge fund in New York.

Throwing money at the problem and propping up greedy banks is like trying to put out a fire by pouring gasoline on it.

I don't believe that an even more dramatic economic or stock-market apocalypse is nigh, but many, many wise people do, and I must admit I am more worried now than I was a few weeks ago.aI have attended two large conferences of global investors in the last few weeks, and it was clear that at both more than half of the participants believed that the Obama administration has stumbled badly, that its programs are too little and too late and that the president's halo is disappearing.

Since late last week, confidence indexes in the U.S., Europe and Japan that had seemed to level out were once again showing growing consumer concern about the economy. The most highly regarded economists and strategists now expect a long, deep, global recession, with stock markets falling another 20 to 30 percent. A vocal hard core warns of years of hard times comparable to the Great Depression at worst or the Japanese lost decade at best.

Here is their argument. The world's governments and central banks are implementing stimulus programs that have fatal flaws. The synchronized collapse in global final demand was caused by the reckless, speculative expansion of money and credit, and now we are in a vicious supercycle of liquidating debt such as the world has never known. Throwing money at the problem and propping up the greedy banks that created the speculation is, as Jim Walker of Asianomics says, like trying to put out a fire by pouring gasoline on it. The result will be an even bigger, more searing fire. Walker argues that the stimulus programs will only prolong and worsen the credit excesses, and that the massive deficits and reckless expansion of the money supply will unleash hyperinflation, a more painful and socially dangerous threat. Think of Germany's hyperinflation experience in the 1920s or more recently ofaBrazil's or Zimbabwe's. He is predictingaa long, deep, global depression with soaring, paralyzing inflation.

Walker is an economist of the so-called Austrian School. Hayek, Hegel and Schumpeter are its forebears, and they disdain Keynes. The Austrians believe that debt supercycles can only be cured by allowing the world economy to fall into a short but very steep and severe depression, which liquidates the debt, bankrupts the sick banks and companies, and causes soaring unemployment, but also lays the foundations for a new era of healthy growth. They call this process "creative destruction," and they concede the pain will be intense but maintain it will be ...