The GFC Can be Solved.....

WestonDave

Generali wrote: »

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.

Fair comment but bankruptcy isn't without cost - be it individual case by case or a mass debt write off. In the case of Prof Keen's proposals you'd simply be kicking the can down the street in the form of solving the current crisis at the cost of creating a massive future retirement funding crisis due to the loss of savings and the impact on shares in companies that get hit by the debt write downs.

So we come back to the same fundamental dilemma which is there is no way of solving this without people taking a haircut on living standards. The political dimension is that choosing the "Keen" option dumps most of that haircut on those that have saved or earned, whereas a longer term slower approach gives the opportunity to spread that by reduced benefits/pensions.

Degenerate

Generali wrote: »

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

A period of moderate inflation and economic growth can still "chip away" at it and enable the insolvent to return to solvency. You may be technically insolvent at a point in time, but escape it when your effective income relative to the debt increases.

Generali

WestonDave wrote: »

Fair comment but bankruptcy isn't without cost - be it individual case by case or a mass debt write off. In the case of Prof Keen's proposals you'd simply be kicking the can down the street in the form of solving the current crisis at the cost of creating a massive future retirement funding crisis due to the loss of savings and the impact on shares in companies that get hit by the debt write downs.

So we come back to the same fundamental dilemma which is there is no way of solving this without people taking a haircut on living standards. The political dimension is that choosing the "Keen" option dumps most of that haircut on those that have saved or earned, whereas a longer term slower approach gives the opportunity to spread that by reduced benefits/pensions.

I agree. There is no way to solve this without reducing living standards for some. I suspect pensioners will be one such group on average.

Degenerate wrote: »

A period of moderate inflation and economic growth can still "chip away" at it and enable the insolvent to return to solvency. You may be technically insolvent at a point in time, but escape it when your effective income relative to the debt increases.

I don't see where the economic growth can come from under conditions of demand destruction. What are businesses going to supply to?

Degenerate

Generali wrote: »

I don't see where the economic growth can come from under conditions of demand destruction. What are businesses going to supply to?

Well this is of course was Keynes' main point. Governments should step in to fill the gap. Instead most governments seem to be in a competition to see who can grind their economy into dust the fastest.

RenovationMan

I saw a statistic yesterday that said the average debt, including mortgages is £58k. That's hardly mass bankruptcy territory.

As I said on that thread, most people have equity in their homes that would, at great need, allow them to sell the home at a large loss and yet still cover the whole of the debt.

I have a much larger than average mortgage debt and yet if the worst happens I could sell off at a 50% loss and still walk away debt free.

Generali

Degenerate wrote: »

Well this is of course was Keynes' main point. Governments should step in to fill the gap. Instead most governments seem to be in a competition to see who can grind their economy into dust the fastest.

It can't work because of the multiplier.

Every pound entering the bank system could be turned into £15 in the good times. Conversely, every pound in debt defaulted on takes £15 out of the system. Government borrowing just makes things worse because it wrecks efficiency in the economy.

Keynes was right in some ways IMO but his principles aren't helpful right now. Also, if you take the time to read his General Theory you will see it's full of inconsistencies and even direct contradictions of other parts of the same work.

wotsthat

Government is talking about us all being in it together but the middle-classes are taking a disproportional hit. This proposal would simply accelerate that situation which is inherently unfair.

It's alright punishing the banks by cancelling the irresponsible loans but on the other hand this also punishes the prudent who didn't overborrow. The reckless borrowers are rewarded by having loans paid off by the prudent.

Joe_Bloggs

Credible governments have to tick the boxes required by the credit rating agencies.

Strong political words and appropriate independent central banking action have had a place in the positioning of the UK economy in the financial market place. This should mean low interest rate government borrowing costs.

Greece is the trailing sheep in Euro flock. How it got in the flock is a mystery. It can't catch up without the support and scrutiny of the rest of the flock.

J_B.

Thrugelmir

RenovationMan wrote: »

As I said on that thread, most people have equity in their homes that would, at great need, allow them to sell the home at a large loss and yet still cover the whole of the debt.

That merely passes the debt to someone else. Pass the parcel is over. The music has stopped.

HAMISH_MCTAVISH

Generali wrote: »

Now I don't know much about Steve Keen
.

Heh heh..... Sure you don't.;)

Professor Steve Keen famously claimed that, just as Japanese house prices had fallen 40% since its Bubble Economy burst in 1990, so too would Australian house prices.

In October 2008 following the onset of the Global Financial Crisis, Macquarie Bank Interest Rate Strategist Rory Robertson challenged him to a bet that this wouldn't happen to Australian House Prices at a debate in the Parliamentary Library, where the loser would have to walk from Parliament House to Mt Kosciuszko.

After spectacularly losing the bet when house prices recovered to previous highs after dipping just a few percent, Professor Steve Keen set off to walk from Parliament House, Canberra, to Mt Kosciuszko on Thursday 15 April 2010.