Tuesday, February 03, 2009

A historian's olution to the banking crisis

A few things kept me away from blog over the past few days.... I return with the recommendations of historian Niall Ferguson on how we might tackle the banking crisis.

Ferguson thinks government spending in the US is not the answer because it will take the budget deficit past the danger mark of 10% of GDP. He proposes instead that:
  • Government recapitalise banks after losses are fully written down and bond holders take a hit of about 20% or convert debt into equity. This is fine but the solution still involves government spending, doesn't it? For some reason, Ferguson would call this 'restructuring' not 'nationalisation' with a commitment to re-privatise after 10 years. If nomenclature will solve the trick, ideologues can please themselves. To me, it's nationalisation.
  • Mortgages be reset at lower rates. This will revive customer confidence. Yes, but it involves a huge hit for banks and holders of mortgage-backed securities. It will also imply a bigger government infusion of funds than otherwise.
Ferguson writes, " The best evidence that we are in denial about this is the widespread belief that the crisis can be overcome by creating yet more debt." Will somebody explain to me how Ferguson's proposals will avoid creating more debt? Or has he made calculations that show that the debt increase in his scheme would be lower than in the Obama scheme?

2 comments:

Somil Patni said...

Sir ,
What do you think is the best(or atleast recommended) approach to solve this crisis . What role can Asia play in resolving this crisis ?
We would like to know your opinion.Thanks.

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