Tuesday, 20 January 2009

Biblical debt jubilee may be the only answer

[...] The Fed has cut rates to zero. It is buying mortgage securities on the open market, and eying Treasury debt next. Fellow central banks are exploring their own ways to print money.

The $3 trillion (£2 trillion) fiscal blitz by the US, China, Japan and Europe plugs an emergency gap. With luck, it will keep the world economy on life-support just long enough to stop recession and banking crises from feeding on each other with lethal effect, as they did in 1931.

The latest plans to "ring-fence" bad debts in sceptic tanks puts in place the fourth pillar. The UK Treasury's version involves a state insurance scheme, letting banks shuffle off their crippling loads and escape mark-to-market torture.

The US version is a "bad bank" for mortgage debt. It is more or less the old "TARP" passed by Congress, before the funds were diverted into bank recapitalisations. This method worked after the Savings & Loan crisis in the 1980s. The market found a floor. The Treasury even made a profit.

German finance minister Peer Steinbr├╝ck said he "could not imagine" a bad bank in his country. Time will tell. Der Spiegel reports that Germany's top 20 banks have €300bn (£270bn) of bad debt, booked at "illusory" prices. They have written down just a quarter of their losses.

Taken together, the rescues may make the difference between global recession and a deeper slump that causes mass unemployment and social turmoil, perhaps destroying the open global order we take for granted. We can only guess.

There is no guarantee that the measures will succeed. The vast scale of government borrowing may exhaust the stock of global capital. Markets are already beginning to question the credit-worthiness of sovereign states. The Fed may find it harder than it thinks to disengage from colossal intervention in the bond markets.

In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.

Creditors are not going to like that.

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1 comment:

David said...

Is this a quote?

A jubilee for whom? Does this lead to unjust enrichment of - poor American homebuyers, primary lenders, financiers, speculators?

I just wish I could say that poor American is a contradiction in terms but their social policy is co bad !