Peter Boone, Simon Johnson, and James Kwak at The Baseline Scenario are out with their revised economic outlook.  It is well worth a read.  We do find one quote about the financial sector to be disturbing to us:

“The core problem is that large segments of the financial sector are insolvent, or that many market participants believe that large segments of the financial sector are insolvent.”

Well, which is it?  The two ARE NOT equivalent.  The banks can pay their debts or they cannot. It seems even the wise men at Baseline are confused about whether the problem is one of perceptions or reality. The government’s efforts to manipulate perceptions by manipulating information releases will ultimately fail to turn us around (without major pain) if in fact, “large segments of the financial sector are insolvent”.  If, however, the  insolvency of the sector is only an incorrect, overly-pessimistic perception of the public that can be set aright by our benevolent government slowly “leading” us into the light of day thru careful propaganda, then their efforts will ultimately be successful.

We think the situation is real insolvency and not perception.