From yesterday's FT:
The core of the problem, the unavoidable truth, is that our economic system is laden with debt, about triple the amount relative to gross domestic product that we had in the 1980s. This does not sit well with globalisation. Our view is that government policies worldwide are causing more instability rather than curing the trouble in the system. The only solution is the immediate, forcible and systematic conversion of debt to equity...
He's come to much the same conclusion as I have, for slightly different reasons, but it's all good stuff nonetheless.
Another one bites the dust
3 hours ago
5 comments:
What an excellent article, cutting through all the fancy crap and stating the bleeding obvious - debt is a burden rather than the lifeblood of a buoyant economy.
I'm not sure how debt for equity swaps would work in relation to secured debt such as a normal house-purchase loan secured by a first charge. The effect of the first charge is that the lender effectively owns equity to the value of the outstanding loan (or to the full value of the property charged if it is less than the amount outstanding).
Releasing a proportion of the debt in exchange for an equal proportion of equity doesn't seem to make business sense - it amounts to releasing the borrower from his obligation to pay interest on that part of the loan in return for something the lender has already, namely an interest in the property. I'll have to think more about this.
TFB, in terms of housing, the extreme form of debt-for-equity swap is handing back the keys and declaring yourself bankrupt.
Not particularly pleasant for those directly concerned (but double-plus good for people who'd like to see more 'affordable housing'), but would be a salutary lesson to reckless borrowers and lenders alike. Plus it doesn't actually reduce the real total wealth of the economy, it just crystallises pre-existing losses.
Some good news for UKIP http://news.bbc.co.uk/1/hi/uk_politics/8152099.stm
I know you guys are financial whizzkids while I'm just Mr average when it comes to finance - but with all due respect this article is garbage.
It's got lots of lovely financial terms and some vague generalisations, but offers nothing in terms of practical solutions. As I said, I'm no financial whizzkid, but doesn't equity depend on demand? Therefore, by converting debt into equity are you not at risk of either inflating or deflating demand and thus creating yet another bubble/crunch?
Stan, if you want detailed practical solutions, then read up on GM, Ford, Chrysler etc. The short version is, they converted debt into equity. The long version is about ten thousand pages.
Of course you can't pass a law against people being silly, but you sure as heck can pass a law saying "if a company or bank is over-leveraged and gets into trouble, the government will NOT bail them out", which should fix it.
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