Bad, Yes. Crisis, No.

Charlie Calomiris is a hawk and a bear – a combination which means that his latest paper makes for very interesting reading. It's entitled "Not (Yet) a Minsky Moment" and the big-picture takeaway is that things are bad, but they're not really bad.

Essentially, Calomiris says that a lot of the international financial architecture got ahead of itself, particularly with regard to securitization. The credit-rating agencies gave too-high ratings to too much asset-backed debt, much of it subprime-related, and when subprime default rates started to spike, the result was a deserved "collapse of confidence in the architecture of securitization [which] led to a sudden need to reallocate and reduce risk in the financial system".

That said, however, the collapse of confidence could hardly have happened at a better time. Banks are liquid and well capitalized, corporate leverage is low, and house prices, contra Robert Shiller, are actually not plunging nearly as much as anecdotal evidence might suggest. We're now going through a deleveraging and a reintermediation of the banking sector which might be painful, and will certainly cause a slowdown in the US economy, but there aren't major systemic risks, and a fully-blown "Minsky crisis", where asset prices go into a vicious freefall, is still remote.

Calomiris's diagnosis feels reasonably correct to me. Interest rates and unemployment are both low, and the people who lost a lot of money over the summer were generally speculators and financial professionals who could afford it. If you were playing around in the structured-credit markets, the chances are you got burned badly. If you were just a retail investor with your money in a stock-market index fund, you're happy as a clam: the S&P 500 has already recovered and is hitting new all-time highs.

So the banks will have to take substantial losses, the economy will slow down and possibly even move into recession, but crisis will be averted even without the helpful strength of the rest of the global economy. And a chastening lesson will have been learned, just in time for the gnomes of Basel II to make sure that the new regime's biggest weaknesses, including a reliance on rating-agency letter ratings, can be redrafted and overcome.