... and by extension, The Goblin King, Merkel, Sarkozy and half the Western World.
Chicago Business School Professor Luigi Zingales, argues that bailing out the financial system with taxpayers’ money is wrong. He discusses an alternative – forced debt-for-equity swap or debt-forgiveness.
Via Mark's Any.
Tuesday, 28 October 2008
"Why Paulson is wrong"
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5 comments:
It fair makes you weep don't it?
But don't forget debt for equity equals no politcal points for Busted Brown, so no chance.
MW
You might be interested in this article here from Gary Becker. In it he
echoes, on one hand, Tim Worstall's (?) point that exotic financial instruments spread risk (good!) while on the other the spreading of the risk (and diminishing risk locally) actually increased global risk (bad!). Becker notes " . . the belief that the new financial instruments would help manage and reduce risk, blinded the vast majority of economists (I include myself), bankers, and government regulators to the vulnerability of the whole system . . . "
He might be wrong in his analysis [FWIW I don't think he is] but isn't it refreshing to see somebody actually examining what happened and seeking to draw lessons, rather than yelling "greed! greed!" and demanding more (unspecified) regulation from those who have already conspicuously failed?
U, the arguments are finely balanced. The underlying total risk/losses (i.e. borrowers in negative equity defaulting) figure, i.e. 'reckless lending', was probably increased because banks thought they could shuffle off risk/losses somewhere else. I suppose this is what he menans by 'global risk'.
But there's no point crying over spilt milk. The banks will just have to unwind all this crap - and the recent experience of Lehmans shows that the actual underlying net transfers are quite small.
And if we find that banks are undercapitalised, then the best way to sort it out is debt-for-equity-swaps, not taxpayer funded bailouts, that's the point here.
"And if we find that banks are undercapitalised, then the best way to sort it out is debt-for-equity-swaps, not taxpayer funded bailouts, that's the point here." ...or give the handouts to taxpayers in the form of tax cuts and they WILL pay back debt so giving the banks more cash and hey presto! There you go problem solved.
MW
If I knew that every time I made a dodgy loan I could re-wrap it as an exotic and flog it to UBS or Lehmans, I'd also have little incentive to compute the (local) risk. The "risk" funnily enough was not solely that the borrower could no longer cough up interest or principal but extended to the unconsidered risk (which is what Becker implies everyone ignored) that the lenders suddenly couldn't unload the crap no matter what the wrapping.
With you on the debt/equity policy but also agree with lola that it ain't going to happen since it doesn't give Brown political kudos: he'd much rather debauch the currency in the hope that he'll get re-elected (or appointed to head the IMF) before the house of cards finally collapses.
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