The GFC Can be Solved.....

Generali

....and you're going to hate it.

Now I don't know much about Steven Keen, he may be a bright lad or a nut job but he is right about this IMO.

http://www.smh.com.au/opinion/politics/think-the-gfc-was-big-you-aint-seen-nothing-yet-20111011-1litt.html

There is simply too much debt to be repaid and that's before you consider the unaccounted liabilities. For example:

In the 1920s, private debt rose by 50 per cent. Between 1999 and 2009, it rose by 140 per cent. The debt-to-GDP ratio in the US is still much higher than it was when the Great Depression began.

So the solution?

...Keen says, the key to averting or curtailing a second Great Depression is to reduce the levels of private debt, through a unilateral write-off, or jubilee. The irresponsible loans the banks made should not be honoured. This will mean taking many banks into receivership. Otherwise private debt will sort itself out by traditional means: mass bankruptcy, which will generate an even greater crisis.

Now the point, IMHO, that Mr Keen misses is that savings are debt. If you save money you lend the bank money unless you keep your savings under the mattress which isn't very MSE. If unrepayable debt is going to be forgiven then that must include a chunk of peoples' savings. RBS can't afford to pay you back what it owes you and nor can the British Government. How is that different from the position Greece is in?


Ultimately, again IMO, the mistakes have been made already. The choices are between what is least worst. Would you rather lose half of your savings or your job for example? I suspect that depends on your age. I suspect retirees are going to have a hard time of it in the near future.


I don't wish any of this on anyone but it's the only way out I can see.

vivatifosi

Sorry Gen.

Is GFC global financial crisis, Greek financial crisis or something different?

I only know what KFC stands for.

I did try and read the article, but not having a brain the size of a planet got lost at the bit that said:
Sonnenschein-Mantel-Debreu theory and the 41-line differential equation.

Generali

vivatifosi wrote: »

Sorry Gen.

Is GFC global financial crisis, Greek financial crisis or something different?

I only know what KFC stands for.

I did try and read the article, but not having a brain the size of a planet got lost at the bit that said:
Sonnenschein-Mantel-Debreu theory and the 41-line differential equation.

I have no idea what the equation thingy is. GFC = Global Financial Crisis. It's what started in 2007/8.

Joe_Bloggs

So a global/regional nationalisation of all banks and a haircut for all savers. That will be a hard sell to the voters.

I suspect that the instant that savings deposits are meddled with then the reputation of the banking institution/country/region involved will drop to zero.

What of pensions? What of other asset classes held by savers ?
What a load of tosh to fill a space in a newspaper.
J_B.

WestonDave

Surely what he is proposing is simply a massively speeded up version of what is happening with all sorts of political and social consequences which might be avoided by the current slower approach.

QE is gradually causing debt to be inflated away, which includes the value of savings, but it avoids putting the banks into prepack insolvencies only for them to re-emerge ready to roar off into massive profits again. We need to retain their transaction processing capability so we couldn't allow them to totally disappear and rebuild from scratch. As it is many debts are being quietly written off or provided for against ongoing banking profits.

Politically if you announced that "granny" was going to lose her savings whilst the oik next door gets the credit on his BMW written off because he was living beyond his means, you'd be lucky to get back to your second home alive! The backlash against the perceived !!!!less or non contributors in society would be massive and potentially socially destabilising.

Generali

It's easy to knock it but what's the solution then?

IMO there's more debt than can be paid down. The debt has to be reduced one way or another. You can do it the easy way or the hard way, the choice is yours.

vivatifosi

Generali wrote: »

I have no idea what the equation thingy is. GFC = Global Financial Crisis. It's what started in 2007/8.

Thanks Gen. I've never seen it abbreviated before.

Degenerate

Generali wrote: »

....and you're going to hate it.

Now I don't know much about Steven Keen, he may be a bright lad or a nut job

He's a nut job, and I suspect you know it and are just posting this to provoke comment.:D

Now the point, IMHO, that Mr Keen misses is that savings are debt.

That's one glaring hole. The other is the total fallacy he puts forward about monetarist economics and base money. Shortage of base money is not what concerns competent economists like Bernanke or the BOE MPC. It's broad money that they are concerned with. The reason they tinker with the base money supply is because that is the element of the broader money supply that is under their control, which they can increase to offset the collapse in credit.

I don't wish any of this on anyone but it's the only way out I can see.

The real "ugly solution" that people won't like for the debt crisis is to inflate it away. That's how you can spread the losses evenly without causing the sort of economic carnage that cascading mass bankruptcies would wreak. The real goal we should be aiming for is to keep as much of our productive capacity intact as possible, keeping companies in business and people in jobs.

Unfortunately, the insane hard money & austerity agendas being pusued by many world leaders are totally counter to this.

WestonDave

Generali wrote: »

It's easy to knock it but what's the solution then?

IMO there's more debt than can be paid down. The debt has to be reduced one way or another. You can do it the easy way or the hard way, the choice is yours.

Which are you defining as the hard way - the long boring tedious slog of slowly chipping away at it, or causing violent political upheaval by shaking the entire financial system up. I'm not seeing an easy option here!

Generali

WestonDave wrote: »

Which are you defining as the hard way - the long boring tedious slog of slowly chipping away at it, or causing violent political upheaval by shaking the entire financial system up. I'm not seeing an easy option here!

Slowly chipping away at the debt isn't a solution if, as I believe, the problem is one of solvency rather than liquidity.

My belief is that the mistakes have already been made. Now we have to find the least worst solutions. Nothing is risk free even if it is sold that way.

Realmoney_2

vivatifosi wrote: »

Sorry Gen.

Is GFC global financial crisis, Greek financial crisis or something different?

I only know what KFC stands for.

I did try and read the article, but not having a brain the size of a planet got lost at the bit that said:
Sonnenschein-Mantel-Debreu theory and the 41-line differential equation.

It should be JFC, but Yankies say Geez f'in Christ.


Any way it would be very deflationary to write off loads of toxic debt.

The reason we have deflation now is because outstanding revolving credit is collapsing, people are paying off debt or defaulting and uncertantiy means not much new borrowing.