DEBT REDUCTION AFTER CRISES
The latest BIS quarterly is excellent as always, but one section is particularly pertinent to the current environment. The authors provide an excellent overview of past financial crises and why they wreak such havoc on an economy. Their findings are similar to the events currently unfolding in the United States – a debt bubble ultimately results in extreme excess, asset collapse, economic collapse and ultimately a long period of private sector de-leveraging.
As I’ve been arguing for several years now the true key to quickly overcoming a debt crisis such as the current one is an austro-keynesian approach. Assets must be written down, the debt must be largely extinguished, the losers must lose, the market must be allowed to work and the government should provide aid in cases that does not impede the aforementioned steps. This is obviously not what we have done.
The best playbook, in my opinion (and the BIS confirms this), is something similar to what I advocated at the time of the bank bailouts – a Swedish approach. Unfortunately, we have opted for the Japanese “workout” approach. This likely means below trend economic growth, continued de-leveraging, a risk of deflation and a great deal of economic uncertainty. I highly recommend reading the report in its entirety. It provides an excellent overview of our current woes:
Source: BIS
Assets must be written down, the debt must be largely extinguished, the losers must lose, the market must be allowed to work and the government should provide aid in cases that does not impede the aforementioned steps. TPC
Or the population could be bailed out which would fix the banks too. The banks might suffer in real terms but that is only justice since they are the villains in this mess.
Thanks TPC, I agree with you a Swedish approach to the financial sector would have been more appropriate.
bail out no one or no thing……i never forgot the trash again after getting my allowance confiscated for forgeting it…….. no consequence of your actions dooms you to repeat your mistakes….i see that playing out in the nieghborhood kids everyday.
push some TPC electrons fix the bridges, solar power in the desert(too bad for sen. boxers lizards), natural gas in the semi-trucks.
real stimulis instead of crony-rewarding.
MR Beard, this is pretty much my thoughts as well.
Home owner A is $30,000 under water to bank.
Seems logical to route the $30,000 from the treasury through home owner to the bank.
Instead of simply adding it to the banks balance sheet and keeping Homeowner A on the hook for the loss while they have been made whole.
The Bank seems to be double dipping.
What am I missing?
Thanks
hate to say it cowpoke, but i believe those now whole homeowners would would be deprived of boatman’s lesson of consequence of their actions, and ultimately at our expense.but i see your point, i just don’t think the banks should have got it either.
i have a lever action 1894c rifle i love to cock and shoot snap caps at idiots on TV while i listen to texas hill country music.
Seems logical to route the $30,000 from the treasury through home owner to the bank.
Instead of simply adding it to the banks balance sheet and keeping Homeowner A on the hook for the loss while they have been made whole. isxcowpoke
Yep. Instead we’ll here screams of “money printing” when it is genuine money that is needed. An expanding and contracting money supply is nasty business.
make that “hear” instead of “here”.
What am I missing?
There is no point in paying off all of the debt, when at least some of it can be written off.
Beard is under the mistaken impression that debts must be repaid in full. They obviously don’t need to be; bankruptcy courts make a point of forcing at least some creditors to stuff themselves.
Paying off the debt with inflated dollars is pointless. The Swedish bank nationalization/ good bank-bad bank model would have dealt with this swiftly.
Unfortunately, American reactionary politics barred us from doing anything that seemed even remotely European, so we’ve had to compromise. I would expect more debt write offs in the future, but they will come in more slowly and at lower levels than were needed to quickly reignite the economy.
the swedish approach !!! at last it is mentionned !
Debts are either paid off or defaulted. All we did was to kick the debt time bomb down the road via re-financing or as zombie loans in off balance sheets thanks to Mark to Market accounting fantasies.
Debts are either paid off or defaulted. ObaMao
So pay em off with new legal tender fiat. Replace horizontal money (credit) with new vertical money (United States Notes). Also, give an equal amount to the savers to compensate them for suppressed interest rates. At the same time, raise reserve or capital requirements to prevent an inflationary spiral.
I think just about only thing helicopter Benny can do it printing $$$s as means to fight the deflation ghost while giving birth to inflation monster.
But do you really think helicopter Benny will orchestrate a SOFT LANDING to Goldilocks la la land?
i think we all know the answer to that if we recognize the world as it is instead of what it might be.
i accepted human nature along time ago.
But do you really think helicopter Benny will orchestrate a SOFT LANDING to Goldilocks la la land? ObaMao
Sure. Why not? And the savers better get on board since:
1) They would get an equal amount.
2) A deflating economy is dangerous even if one’s savings go further. One may have savings but no job. Also, desperate folks do desperate things sometimes.
3) Borrowers WERE driven into debt via negative real interest rates in housing.
4) Debt forgiveness is Biblical and we need God’s help, imo, to avoid a nasty repeat of the 1930′s and 1940.
“In the real world debt forgiveness does not exist but default does.
The fact that the central bank reserve are at record high and it can not monetize does not mean that it could not let the treasury draw cheques on its account at the central bank.
You’re basically referring to deficit spending. I think Obama’s speech made it pretty clear that he is not about to balloon spending….He thinks we’re near bankrupt.
He thinks we’re near bankrupt haaaaaaaaa
Intellectually he may be right
TPC: Is it possible to devalue the dollar against just gold? I hear that idea bantered about on the Internet as a way to solve the debt problem but don’t understand how that would work.