Start With The Correct Diagnosis

Still got my hands full with stuff, so not a lot of time to blog and write on my own. But I'll add this absolutely wonderful piece that I came across in today's Fish Wrapper. It's the best of the several very good pieces I've read yesterday and today. Coincidentally, it comes from a recently-used Quote of the Moment author, Niall Ferguson. Quick and dirty summary:

1. The present economic crisis was not generated by insufficient government or consumer spending. Rather, it is a crisis of too much debt. Attempting to distinguish between "good debt" and "bad debt" is useless. Creating more debt to solve a problem of too much debt is asinine.
2. The "multiplier effect" theorized by Keynes works, if at all, only in a closed system, so spending in a globalized economy is akin to pissing in the wind.
3. Because the financial problem is global, and the economy has been globalized, we cannot solve the financial credit crunch by devaluing or inflating the currency,* or by defaulting on the underlying debts.
4. Therefore, financial losses need to be absorbed and accepted, and the banks must be restructured as a prophylatic against further risks and losses of the scale we've seen in the past year.
5. Mortgages and other loans that have survived to this point will sooner or later need to be restructured to realistic and stabilized interest rates, and the balances crammed down to something resembling market values. This has to apply to both 'high risk' and 'low risk' securitized loans. While in the short run this gives it to the banks straight up the ass, in the long run, enduring such a financial enema will create a stronger and more stable economy.

Okay, I might be rephrasing rather loosely on point five, although I think that is fundamentally the point Prof. Ferguson is making.


* I'll add here that devaluing a particular currency will, in a globalized market, seriously harm the nation whose currency is thus devalued.