Rolf Englund IntCom internetional
"The end of lightly regulated finance has come far closer"
"The US public expects action. The question is whether it will get the right action."
The fundamental problem with the Paulson scheme is that it is neither a necessary nor an efficient solution.
When people fear mass insolvency, lenders stop lending and the indebted stop spending. The result can be the “debt deflation”, described by the American economist, Irving Fisher, in 1933 and experienced by Japan in the 1990s.
Many people and institutions made leveraged bets that have since gone sour. Their debt cannot be repaid.
Above all, a scheme for dealing with the crisis must be able to remedy the looming decapitalisation of the financial system in as targeted a manner as possible.
, I would add one by Luigi Zingales of Chicago University’s graduate school of business.
"The high priest of laisser-faire capitalism"
Mr Greenspan , who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.
Temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them (kurs här).”
But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.
”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”
“The reasons why the massive liquidity injections and policy rate cuts by central banks have miserably failed are clear,”
Over the past few weeks three experiences have helped clear my mind on this crisis.
Second, I engaged in a debate on the future of regulation with my admired colleague and friend, John Kay.
What went wrong?
Is the worst now over? Certainly not
Unwinding of excesses on such a scale involves four giant processes: the fall of inflated asset prices to a sustainable level; de-leveraging of the private sector; recognition of resulting financial sector losses; and recapitalisation of the financial system. Making all this worse will be the collapse in private sector demand, as credit shrinks and wealth falls.
None of these processes is even close to completion. Some have barely begun. In particular, property prices are still falling, even in the US. Similarly, the adjustment in the real economy, particularly the inevitable rises in household savings rates in the US and UK are at an early stage
The big divide is between those – the Austrians