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"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.
It is not necessary, because the Federal Reserve is able to manage illiquidity through its many lender-of-last resort operations.
It is not efficient, because it can only deal with insolvency by buying bad assets at far above their true value, thereby guaranteeing big losses for taxpayers and providing an open-ended bail-out to the most irresponsible investors.
Martin Wolf, Financial Times, September 23 2008 19:38
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.
Why Paulson is Wrong
a short note by Luigi Zingales
A finance expert's review of Paulson's Resolution Trust Corporation (RTC)
"The high priest of laisser-faire capitalism"
The US government may have to nationalise some banks on a temporary basis
to fix the financial system and restore the flow of credit
Alan Greenspan, Financial Times February 18 2009
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,”
“We are facing a credit/insolvency problem in addition to a liquidity crunch and central banks’ monetary policy is impotent in dealing with credit problems.”
NOURIEL ROUBINI, November 26th, 2007
Over the past few weeks three experiences have helped clear my mind on this crisis.
First, I reread Hyman Minsky’s masterpiece, Stabilizing an Unstable Economy.
Martin Wolf, Financial Times, September 16 2008
Second, I engaged in a debate on the future of regulation with my admired colleague and friend, John Kay.
Finally, on Monday, I moderated a session on this crisis at the Swift International Banking Operations Seminar in Vienna.
What went wrong?
The short answer: Minsky was right. A long period of rapid growth, low inflation, low interest rates and macroeconomic stability bred complacency and increased willingness to take risk.
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
– who hold that the mistakes are made by governments while the solution is to let the distorted financial edifice collapse
and those – the post-Keynesians
– who hold that a modern economy is inherently unstable, while letting it collapse would take us back to the 1930s.
I am decidedly in the latter camp.
Martin Wolf, Financial Times, January 3, 2012