EconoMonitor

Nouriel Roubini's Global EconoMonitor

A proposal to prevent wholesale financial failure

From the FT:

The worst financial crisis since the Great Depression has highlighted the risks from the collapse of systemically important financial institutions. Huge bail-outs were undertaken based on a fear that the collapse of such institutions would cause havoc, with collateral damage to the real economy. Examples include Bear Stearns, Fannie, Freddie, AIG, Citi­group, the insurance of money market funds and new US Federal Reserve programmes for banks and broker-dealers. Allowing Lehman Brothers to collapse had such severe systemic effects that the global financial system went into cardiac arrest and is still dealing with the aftermath.

We propose a way to measure and limit this systemic risk and reduce the moral hazard and the cost of bail-outs. Our proposal is to impose a new systemic capital requirement and systemic insurance programme.

The current situation leaves the system vulnerable to financial contagion when big banks (or many small ones) go bust. The root of the problem is that banks have little incentive to take into account the costs they impose on the wider economy if their failure prompts a systemic liquidity spiral. This is akin to when a company pollutes as part of its production without incurring the full costs of this pollution. To prevent this, pollution is regulated and taxed.

Unfortunately bank regulation, such as the Basel accord, ignores systemic risk since it analyses the risk of failure of each bank in isolation. It seeks to limit the probability of failure by each bank, treating isolated failures and systemic ones in the same way (and also ignoring how much a bank loses if it fails). However the move by many large banks to lever their balance sheets with similar mortgage-backed securities is more dangerous than if they had made loans to diverse borrowers.

More broadly, a systemic crisis that feeds on itself is more dangerous than the isolated failure of smaller banks. A small bank will probably be taken over with a smooth transition of operations – it does not bring down the economy.

There are two challenges associated with reducing the risk of a liquidity crisis. Systemic risk must be first measured and then managed. We propose to define a bank’s systemic risk as the extent to which it is likely to contribute to a general financial crisis. This measure can be estimated using standard risk-management techniques already used inside banks – but not across banks, as we propose – to weigh how much each trading desk or division contributes to the overall risk of a bank. We set this out in an NYU Stern project on restoring financial stability.

With this measure of systemic risk in hand, a regulator can manage it. We propose two ways to manage systemic risk. First, the regulator would assess each bank’s systemic risk. The higher it is, the more capital the bank should hold. This would seek to ensure that the banking system as a whole had sufficient capital relative to the system-wide risk. This is just like the headquarters of a bank charging each trading desk or division for use of economic capital measured by its contribution to overall firm risk.

Second, each institution would be required to buy insurance against its systemic risk – that is, against its own losses in a scenario in which the whole financial sector is doing poorly. In the event of a pay-off on the insurance, the payment should not go to the company, but to the regulator in charge of stabilising the financial sector. This would provide incentives for a bank to limit systemic risk (to lower its insurance premium), provide a market-based estimate of the risk (the cost of insurance), and reduce the fiscal costs and the moral hazard of government bail-outs (because the company does not get the insurance pay-off). Since the private sector may not be able to put aside enough capital for all the systemic risk insurance, government could provide part of it. Government already provides such partnership on insurance with the private sector in terrorism insurance.

We believe our proposal offers several advantages by explicitly addressing systemic risk based on tools already in use by private companies to manage internal risks. Our proposal is a better way to deal with the trade-off between letting a large institution go bust (Lehman, for example) and causing a global cardiac arrest of the financial system or being forced to spend trillions of dollars of taxpayers’ money to bail out such systemically critical institutions.

73 Responses to “A proposal to prevent wholesale financial failure”

MedicJanuary 30th, 2009 at 8:32 am

Now to the important stuff:Professor, what about the insurance company? How much should they keep on hand?How about if the banks cannot sell securitized loans an the secondary market or if they have to account for loans they write that go bad?For me the most obvious thing here is that banks have no incentive currently to write good loans – they sell them off and they are gone – no skin off their nose if people default.How about we fix that? How about if we have REAL regulation that would protect all investors by making sure loan originators did their damn job and made sure loans had a high potential for pay off?And as for assessing risk – well let’s try some new folks with that. Clearly the ratings agencies have poor skills and are incapable of doing some solid work there.

One-Eyed FionaFebruary 1st, 2009 at 11:18 am

Agree with you, Medic. When I first read this post, I thought I must be missing something, but I’m glad to see I’m not the only one to spot the infinite regress which Dr. Roubini’s proposal implies (insurance contracts on the insurance contracts on the ins…)We need good loans that are originated and HELD (not sold); lower bank cap-to-loan ratios (isn’t THIS really the whole starting point of the current problem?); and REAL regulation.THe election of Obama is an opportunity to “reset” value, but I’m beginning to believe that no party speaking for the public is viable in a business-run society. With proposals like this coming from our top economists, confidence in the US economy continues to drain steadily away (sometimes in gushes like the Madoff scandal, sometimes trickling in rivulets like Geithner’s and Summers’s appointments and Roubini’s approval of them).One-Eyed Fiona

K AckermannFebruary 2nd, 2009 at 2:32 am

I’m glad you brought up Madoff. How are we supposed to respond to the SEC ignoring this letter?Are we to believe them saying it was an oversight? In fact, the letter sort of implies it was common knowledge that Madoff was a thief.The SEC can lie all they want, but I flat out don’t believe them, and that means I think the government in a way approved of the crime.All those people knew and nobody turned him in. Madoff sat on some pretty powerful boards, yet nobody’s ever heard of him now.They all make me sick. I wish the worst on them.

V1_BrazilJanuary 30th, 2009 at 2:50 pm

The fix is: nationalize all banks insolvent, put public money on it, and after 2 or 3 years sell them in a IPO to rescue some treasuries… All shares of a insolvent bank go to zero… All the executive stuff of a insolvent bank fired with no money, or, with +/- 50.000… All the top functions on that bank, fired… Limit the money that employee can get to +/- 50.000… Renew all workers to cheaper in a +/- 2 years cicle, with a public contest… Lower the wage… Close some doors… Is this or L shape forever… No one in private sector will put good money in a old and expensive structure… Forget it… The solution proposed by professor is for the future, not for the present… There is future to a expensive structure?

V1_BrazilJanuary 30th, 2009 at 3:01 pm

The US system looks like capitalism, but is no more capitalist… Is a mixing of capitalism and socialism… Is no longer a pure capitalism… Get the worst part of each… The fat state of socialism… The social diference of capitalism… Each old corporation act like a mini US… GM, for example, is no longer reliable because is too fat… Its just a matter of size… I love GM cars… GM mark is valuable, but not reliable…

V1_BrazilJanuary 30th, 2009 at 3:09 pm

When shares pulverize too much, or became too cheap, the corporation has no longer a owner, is no more capitalist, is a capitalist structure degenerating to a socialist structure, it become a “mini me” of state…

V1_BrazilJanuary 30th, 2009 at 3:25 pm

To the capitalism works, is necessary recycling of money and corporations…To the socialism works, is necessary too much comunitary spirit… But there is no country with such spirit, then it does not work properly… Most of people are selfish…

MarkJanuary 30th, 2009 at 6:29 pm

I’d offer that it’s more fascism than socialism. Sure, the banks will become the “Peoples'” banks, but it’s really only for the benefit of TPTB.Mark

GuestJanuary 30th, 2009 at 6:40 pm

In ‘traditional’ socialism the thought was that people benefited – not in form of higher income but because of for example job security which was good for family life (not to mention nationalized health care and paid university education).In the US style socialism it is the corporations and investors that benefit. The populace is only helped because they are needed as consumers.

SoftwarengineerJanuary 30th, 2009 at 7:28 pm

GREETINGS V1Is it selfish to borrow more than you can afford and expect the taxpayers to bail you out?Is it selfish to support certain types of bailouts [like home mortgage] just because it makes your similar investments sink in value?Selfishness occurs equally on both sides of the river.

rbmJanuary 30th, 2009 at 9:20 am

With regard to the second point on required insurance, who will sell the insurance and what confidence would the market have in a non-governmental insurer? Couldn’t the government become the ultimate counterparty for an entire portfolio (rather than creating a “bad bank” or RTC for bad loans)? Banks/insurers would have to pay a premium for this full-faith guarantee (say at an average of 300 basis points).

GuestJanuary 30th, 2009 at 9:24 am

If a mega bank with a high systemic risk should fail, are their insurers large enough to pay the claims?

Tom KnottJanuary 30th, 2009 at 9:43 am

The sheer scale and complexity of the problems makes it hard to get through to some of the basics. Some of these are very ugly. One fundamental question, for example, is whether the world any longer needs a City of London finance market anything like the one that has just collapsed. There may be some residual functions left over, perhaps central to some limited UK needs, but the City of the immediate past will be gone, and in the UK we will need to be aware of the full implications. If we fail to do this, then the impact will be worse than it already is. All we are getting at the moment is how tourism will come to the rescue, and what a wonderful three weeks we will have when the Olympics take place in 2012. Unless all the disaffected groups put a stop to them.

GuestJanuary 30th, 2009 at 10:04 am

Wouldn’t the more onerous capital requirements adversely impact many of the largest, most successful banks? In effect, punishing success.

Guest2January 30th, 2009 at 10:43 am

Your comment would make sense if we lived in a world of small to mid-sized banks, but the fact is that we live in a world of small to mega-max-sized banks. The profits of the mega-max-sized, “too big to fail” banks have been subsidized since the 80s by the regulators’ commitment not to allow them or the investment banks (policy since the 1987 crash) to go bankrupt. So every one of those $1 million plus paychecks for the past 2 decades was effectively subsidized by the taxpayer. It’s way past time for the “largest, most successful” banks to pay their dues.

MAJanuary 30th, 2009 at 10:07 am

Nouriel.The pools of money that are gathered would do what?I get that they’d be held there as a reserve… but just a stagnant reserve?Would they repo overnight, bouncing off of treasuries? There would have to be some sort of productive value to the reserve otherwise it would lose to infaltion every second it sat there.Now if it is put to use… who decides for what? Would foreign banks (that are interwoven with domestic banks) also chip into the risk payments? If so, then overnight repos would need a worldwide overnight move that wasn’t UST biased.Solutions could be made… but there are a lot of grey areas that may become political. Then we know where that’ll take us.Either way, it’s interesting in theory.Miss Americap.s. For those of you who follow my calls, I still believe in my recent plays (especially the 401k equity move). Pride will not get in the way of me saying that I could be wrong… but I will not concede yet on my call for gold to drop as I still believe the shake out will go down and we will see a LARGE drop in the near future. If I were to timeline it, I’d give this no longer then 3-6 months to play out.

KerwinJanuary 30th, 2009 at 3:16 pm

You raise a good point, MA – what will the pool of money be used for? The potential pool will be of a serious magnitude considering that all financial institutions will have to contribute.It becomes more involved when you consider that the money should most likely be invested, to starve off negative effects like inflation, just like you said. But then the management thereof becomes a question because we have and are witnessing the results of bad investments in the current system.Until there is a way to moderate and eliminate bad investment products all together (a very serious task considering the dynamic nature of finance), the funds pooled into this initiative run the risk of getting involved in a bad investment (directly of even indirectly).What happens when the money that’s supposed to be used to bail out crises brought on by bad investments is itself lost in the cycle of bad investments?We may have the insurance against future crisis but this too will have to be managed. We don’t want another AIG’esque occurence.

MarkJanuary 30th, 2009 at 6:32 pm

but I will not concede yet on my call for gold to dropIt’s inevitable. One day you will be right on this point. But… it’s all a matter of timing, isn’t it?The race is on: will the USD collapse before the world economic system collapses?Mark

One2ManyFebruary 5th, 2009 at 3:27 am

Your comment prompted me to look at the chart on gold in USD. The mid point since the 2008 high has been circa 857 and currently this is quite close to the 200 and 300 day moving averages. So a move down of >50 from the present 910 would probably be needed to take out most of the stop losses and clear the way for a downtrend to develop. Support would then become 650 – 680.At present gold is trending up and my people who look at the Dow : gold ratio (now about 8.7) think it can head towards 5 . That’s pretty bearish for equity/bullish for gold !

KaaskopJanuary 31st, 2009 at 2:16 pm

Thank you MA,Your calls are always welcome… I am glad you stick to your thesis coz I have similar line of thinking reg. equities and gold in the near future.Cheers,

ccmJanuary 30th, 2009 at 10:34 am

First, the regulator would assess each bank’s systemic risk. The higher it is, the more capital the bank should hold.This is a great proposal! Imagine how different the world would be if a bank of Citi’s size was required to have a leverage ratio of 8 or 10%. It’s also a good way to keep the banks in the banking system below the “too big to fail” threshold.On the other hand, I’m not sure that “systemic risk insurance” can work — though it’s probably worth a try. Pricing is too difficult for rare events and when its underpriced the likelihood of systemic risk will rise and by the time people figure out what’s wrong and start raising rates, raising rates could be the trigger that sets off the systemic event. Furthermore doesn’t government involvement in insurance markets almost always result in underpricing?In any case forward looking systemic risk insurance won’t cause problems, as long as people don’t think they can rely on it to prevent systemic crises.

GuestJanuary 30th, 2009 at 4:36 pm

Due to minimal transparency of the intertwined financial and insurance systems, accurately determining “systemic risk” is like trying to hit a moving target while blindfolded: you will have many more misses than hits! Until we have full transparency and disclosure it is not clear as to the best solution.

Andrew G. BernhardtJanuary 30th, 2009 at 7:08 pm

Oh, and with bank (and the entire financial sector’s failure and looming bankruptcies) people will have to use FDIC & SIPC which will infuriate people with the entire banking sector— I see a total loss of confidence looming in American, and abroad. People will be wondering if capitalism is dead or something. Clearly, the Government scoundrels need to limit their borrowing and reckless spending of borrowed (printed, and tax revenue) funds. I see great risk of intense regulatory changes, additions, and risk itself— It’s (the regulatory risk) just even more political risk! This regulatory risk is enough to make my stomach hurt— and will most likely just get in the way, and make investors angry. Talent is likely to leave the country, and people are already angry about capital gains tax and streaming income tax, which e.g. the UK does not have! The Congress should try to regulate itself, and limit its own reckless stupid spending sprees- which crowd out borrowing and crowd out investment (which is the root cause of all the world’s economic and financial capital market’s problems). Nationalization of the entire financial sector is also not a good idea. Laissez-Faire, no government intervention please!~ Andrew G. Bernhardt, St. Louis, MO.

V1_BrazilJanuary 30th, 2009 at 9:15 pm

And what is your sugestion, Andrew? Im starting think that L shape is a flawless victory, given the actual conditions… Now we have to avoid shape…

GuestJanuary 31st, 2009 at 3:37 pm

This just occurred to me (paraphrasing Douglas Adams): Too big to fail = first against the wall when the revolution comes…

Andrew G. BernhardtJanuary 31st, 2009 at 6:30 pm

I believe we’ll have a lower-case “y” shaped recession and recovery. We’re currently at perhaps a point in the lower-case y, where we’re kinda at the or near the bottom of the “u” if you will before the long tail downward. Then after a short and totally unfounded and unwarranted rally, we’ll have some more bank failures, bank runs, FDIC and SIPC will have to be triggered, and people will lose confidence in the banks. Then Municipalities and States will beging to cry to the Congress for money, not sure why they’ll get it. Then We’ll have an inflation problem. PEs are in-line with historical norms too, and if we’re going into what I describe as “the greater depression,” then PE ratios should be inline with historical lows. They should be around 5 to 8, not the current 11 to 14!!! So if PEs drop from 14 to 7, then that’s a 50% depreciation of stock indices from the current levels. SO DJIA 4,000 here we come!

GuestJanuary 30th, 2009 at 9:18 pm

Jan. 30 (Bloomberg) — Forty percent of Japanese investors said there is a risk that the U.S. government will default on its debt, a survey published by Barclays Capital showed.Almost 34 percent of the 66 respondents in the poll sent to Japanese institutional investors from Jan. 26 to Jan. 28 said there is a “significant” or “slight” risk that the U.S. will lose its AAA sovereign debt rating this year. Twenty-two percent said they were concerned about the credit risk of German government bonds. China surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries.“Sovereign risk related to national debt has been a recent topic of discussion among market participants,” Lhamsuren Sharavdemberel, a Tokyo-based analyst at Barclays, wrote in the report published yesterday. She confirmed the details today.The cost of protecting $10 million of U.S. five-year bonds from default has surged $53,000 to $60,000, near the highest since Bloomberg started tracking the data on Jan. 28, 2008. Investors are pricing in a larger risk premium as U.S. President Barack Obama seeks Senate approval for an $819 billion stimulus package aimed at lifting the economy out of recession.There is a lot of “concern about an expanded budget deficit under the Obama administration,” Sharavdemberel wrote.The yield on 10-year U.S. Treasuries surged 61 basis points this month, the largest jump since April 2004, on speculation investors may have trouble absorbing as much as $2.5 trillion in debt the U.S. is likely to issue this year to pay for a $1 trillion budget deficit and programs to spur the economy.Foreign Demand FallsInternational demand for long-term U.S. financial assets fell in November as foreign investors sold Treasury, agency and corporate debt, a government report showed on Jan. 16.http://www.bloomberg.com/apps/news?pid=20601009&sid=aQo2GvoJdKVU&refer=bond

V1_BrazilJanuary 30th, 2009 at 9:25 pm

In Brazil, i think that will be — shape for a looong time… — shape will be a great victory (growth zero). Our slogan will be “All rich people of world, here we have growth zero… Come here and survive… Or take your chances…”

V1_BrazilJanuary 31st, 2009 at 1:19 pm

US$ 200.000,00 of investiment or be a high level of cientist or technical, or create a corporation with US$ 50.000,00 that create 10 jobs for at least 2 years…

V1_BrazilJanuary 31st, 2009 at 1:34 pm

I suggest south of Brazil, states of parana, santa catarina, rio grande do sul, but just for those with money… Good to live, but no much jobs… The others states i dont recommend… Sao Paulo is good to work for high level of cientist or technical, but is a huge city, the row state is like 1 giant city…

GuestJanuary 30th, 2009 at 10:47 pm

Starting with tansparency is an essential element. The insurance sounds good to me, because when a bank screws up the insurance will provide a means to rid the system of the hustle-maniacs. Everyone who was counting on that financial institution for something will now turn to the government, and they will get paid.

GuestJanuary 31st, 2009 at 3:48 am

The financial system should be built like a computer system. The applications should never be able to bring down the operation system. Writing more applications(insurance) to trigger when an application goes down is just spaggetti code and will inevitably endup in an infinite loop ( as evidenced by the spiraling economy now). When an application fails the operating system terminates it and relives the system of it’s resource dependencies. Modularization is the way to go with few outside dependencies. Requiring the banks to keep their loans on their books and restricting interbank commerce ( inter application) is the way to go. The communication should be restricted to vertical relationships ( application and operating system) and eliminate hosrizontal relationships ( inter application/ interbank relationships).

AnonymousFebruary 4th, 2009 at 9:46 pm

interesting analogy and i would tend to agree.it seems to me banks need to keep a greater share of their loans on their books. they would have more incentive to deal with bad or at-risk loans in common sense ways, like simple renegotiation of terms.as for roubini’s risk metric, i dont know if that would work because how accurate is the metric?

GuestJanuary 31st, 2009 at 3:53 am

Just an addition. It’s little wonder that the solvent banks in the US today are the ones with the lest dependencies on other banks.

GuestJanuary 31st, 2009 at 4:34 am

Us will have to borrow much more than $2.5 Trillion. I would say $4 Trillions. My guess is that budget deficit alone will reach at least $2 Trillions. This said US is out if it does not starts to tax is’t population according to it’s public debt. The world cannot absorb $4 Trillion of US debt.

GuestJanuary 31st, 2009 at 6:37 am

M&A in banking system has to be made with new fresh collected equity. That because is a business bet made from the administrators in the interest of shareholders (ad administrators too) so banking system will not use someone else money in M&A.

gonzaJanuary 31st, 2009 at 8:56 pm

yo creo que al profundizarse la crisis aumenta la probabilidad de que se resuelva por via de una devaluación del dolar contra el yen y el euro. La deflacion que requieria ajustar los desajustes de la economia norteamericana es imposible que ocurra. ya lo dijo keynes en el largo plazo todos estamos muertos.Devaluar salarios y activos norteamericanos, va a sincerar perdidas y devolver rentabilidad sobre actividades productivas en USA ademas de resolver desbalance de cuenta corriente.Quienes pagarian esta salida? los trabajadores norteamericanos, japon y europa y los acreedores de USA (china, estados arabes, etc.)

GuestFebruary 1st, 2009 at 1:10 am

I think the Obama policies (bad banks, loss insurance mortgage restructuring, or capital injection) are like Bush policies; that is to protect the benefit of private investors by using the taxpayers’ money. The best way to solve the financial mess is to let the private investors both equity holders and bondholders get losses.The best solution is called “Value reset”. I mean we should reset the value both the assets and liabilities side of the banks to reflect fair value.1) Value reset on assets side means that the value that banks hold such as mortgage value should reflect the fair value for lenders and borrowers. This looks like Obama trying to do to reduce foreclosure but doing this way is not going to use any taxpayers’ money but use the loss of banks but it does not add any loss for banks because banks already set aside the provision for the risk of this debt default. It help the process of capitalism go on but the way Obama is trying to do is not comprehensive and will create moral hazard that will cause more and more taxpayers’ money from the intervention. More borrowers are prone to default and government needs more money to intervene. The way to reduce debts of mortgage borrowers will cause loss of banks; therefore, we have to do liabilities reset.2) Value reset on liabilities side means the value of equity holders and bondholders must reflect losses from investment in the banks. Some banks have to write down all equities part and to transfer sub-ordinated debt or even some of unsecured debts into equities. This is not going to cause any taxpayers’ money and if governments would like to protect money of depositors; they can join debt and equity swap scheme with other bondholders. This is quite fair for taxpayers’ money and we just use Capitalism process suddenly and aggressively to solve the problem rather than delay this process and use Socialism by using taxpayers’ money to protect losses of private investors.The role of government is to accelerate the value reset process to reflect all fair price and ensure the confidence of new investors that all price reflect the fundamentals not reflect the intervention pricing.I think the way of US government intervention is like Japan did by protecting the wealth of investors by public money. The intervention will cause the lack of private interest on economic activity because no one can measure risk and return and no one can measure what is fundamental value of investment; therefore, private sectors decide not to invest or invest elsewhere like Japan, Russia. So, if there is too much wrong intervention like this, America will definitely live with long deflated economy like Japan.

devils advocateFebruary 1st, 2009 at 8:23 am

the Stiglitz theorem:if cash for trash,then cash = trashthe Greed theorems:if the market polices itselfthen market = crashif we leave the details to Congressthen the details = trash + crash

HubbsFebruary 1st, 2009 at 11:09 am

re: US default on debtIt will be interesting to see what transpires in California, where it looks like IOUs may be the new currency. As they say, so goes California so goes the US.Re: a sort of risk insurance that Dr Roubini proposes based on size of assets. Big banks make more profit, hence their insurance premium greater, but also depends on the kind of loans they are making. If you have a big house, you need more insurance. If you live near hurricane or earthquake prone areas, then your premium is higher.

ranManFebruary 1st, 2009 at 11:30 am

all this ranting about what to do and what not to do about the bank issues. Come on, we all know what really needs to be done. Let the markets figure it out instead of trying to “set” the market price for assets these banks have. Will some of the big boys be insolvent?? yes. by their own devices. They need to be nationalized, assets sold off, executives fired, stock and bond holders take their haircuts, and move on. With all the money being wasted on this, we could have started 10 new banks, capitalized each of them with $25B or so, that puts $250B out there for lending with leverage at a respectable 10-1. This is what the markets are going to do no matter what the fed does. They are just delaying the inevitable.

GuestFebruary 1st, 2009 at 1:45 pm

Yes, yes & yes. All with all this money you could very easily implement national health care and REALLY STIMULATE the US economy.

Helge NomeFebruary 1st, 2009 at 1:19 pm

Dear Sir, Your scheme is perfect for propping up a corrupt system and concentrate power in even fewer hands.

MASHIACH BEN CHANAFebruary 1st, 2009 at 2:34 pm

AGAIN A REMINDERUSA AND IRAN WAR AROUND MARCH APRIL 2009RUSSIAN INVASION OF ENTIRE WESTERN EUROPE WITHIN 20 TO 30 MONTH FROM TODAY.INDIA AND PAKISTAN NUCLEAR WAR WITHIN 36 MONTH FROM TODAY.MORE TO COME I WILL UPDATE THIS BLOG SOON.MASHIACH BEN CHANA.

GuestFebruary 1st, 2009 at 5:35 pm

Question: since only about $90 Billion or so of the $825 Billion stimulus package will be spent on infrastructure, does anyone know if it can be said that more money has been spent on infrastructure improvements in Iraq that are slated to be spent on the so-called infrastructure stimulus programs within the US due to the massive global financial and economic crisis?

GuestFebruary 1st, 2009 at 7:11 pm

An interesting proposal, Prof. In the case of a level, equilibrium economy, it would certainly help.But our situation is now well beyond that. It appears that both the US and the UK are locked into Fisher’s Debt-Deflation spiral. Then one of the risks we should be trying to manage is how to prevent other economies being sucked into the same hole, and the other, of course, how to stop the spiral in the US & UK.A simplistic view is that the spiral can be stopped only by a return of strong demand, which isn’t going to happen until everyone has thoroughly de-leveraged – if there is anyone with any cash after that is over.Suggestions? Ideas?? Or have I got it all wrong?

K AckermannFebruary 2nd, 2009 at 2:41 am

It sounds great, but do it with new banks. If Citi survives this, then I will know that everything I have been told about this nation is a lie.I have a feeling I know what’s comoing too; those warrants the public now holds for bailing the banks are going to be used against us. They are going to say all the shareholders need to get paid in any bank resolution because not doing so will destroy public assets.I will blow a gasket if that happens.

K AckermannFebruary 2nd, 2009 at 2:48 am

How about this: Shrink the banks to size Small, and make them hold 33% reserves.We don’t need any more credit until we can safely use it. Pay as you go from now on.

ignatiusFebruary 2nd, 2009 at 3:37 am

Why so complicated? Just forbid any company – bank or otherwise – with less than x% equity OR negative cash flow OR negative earnings to pay dividends, buy back stock and – most impotantly – pay any form of “bonuses”. Just stopping the plunder of whatever is left when things turn sour would go a long way to mitigate the current and prevent future crisis.

zoostFebruary 2nd, 2009 at 7:08 am

Is there anybody who believes that all the efforts by the governments around the world will succeed in restoring the situation as it was before the crisis? What will happen if they fail? Will we need a new model, or is our current model sustainable? Where will we be in 10 years time? Were there any changes made after the crash of 1929? Do we pick up the pieces and continue like we did? Thoughts?

ranManFebruary 2nd, 2009 at 9:04 am

to answer your question, of course, there are some people that believe what all the gov’ts in the world are doing will fix things. Of course, anyone that can think logically can figure out that this will not work it will only slow the train wreck down a little and maybe, just maybe, spread the pain out over a longer period of time which will somehow make us think things aren’t as bad as they really are.I’m afraid that, so far, all I’ve seen from the Obama administration is MOTS (more of the same). He has picked insiders who were part of the problem to get us out of the mess. Now that the fox is in charge of the henhouse, STFB (stand the F%&k by) because the ride is going to get very bumpy. I fully expect to a get short (1-2 MONTH) Obama stimulus rally in the next couple of weeks. However, with an insolvent banking system and the fed printing like there’s no tomorrow, this will not last.

Jeff FisherFebruary 2nd, 2009 at 9:03 am

Why not end fractional reserve banking, and admit that the whole system is a fraud?100% reserve banking solves all these problems.Separate government from banking and the system will work!

jeff fisherFebruary 2nd, 2009 at 9:11 am

Economists dance around the central bank/fractional reserve model and spin all sorts of rubbish as policy.Look at preservation of Society as the end and the solution is 100% reserve banking and commodity money.NO more fiat money, no more fractional reserve banking, no more deficits.The upside for Society: no more wars of aggression, because the government banks will not be there to provide the funds.Spending/Credit will have to come from savings.What a concept!

repo4saleFebruary 2nd, 2009 at 10:34 am

Activate the RTC like we did in the Early 1990s.Investors like me would “LOVE” to buy assets, just like we did in the early 1990s. “Frugal” cash is waiting for a good deal! Cheap paper & property will get us to invest our “frugal cash”.

Bill YoungFebruary 6th, 2009 at 11:47 am

Why is no one talking about the elephant in the room? As long as the International Bankers who own and control the Federal Reserve Bank and therefore control the supply and cost of our money, we will be at their mercy. They produced the First Great Depression and now the Second Great Depression. If you look back through history, that is the pattern. First they finance a wild period of Boom, fund rampant speculation in some asset, land, oil, stocks (1st Depression), housing (2nd Depression) until it runs its course or they chock off credit. Then maybe through a “quasi” government entity such as the RTC, they and/or their minion sweep in and sweep up the failed assets for pennies on the dollar.Until we restore the Constitutionally mandated government issuance of non-debt money, and get back to an asset backed currency, we will be subjected to these periodic, banker led depredations leading to unimaginable suffering.