I just caught the end of The World Tonight a serious pontificating BBC Radio 4 program where the “expert” said that everyone is treating the financial crisis as a crisis of liquidity whereas in reality it is a crisis of debt. I’m no expert on this but Wikipedia defines Market liquidity as “an asset’s ability to be sold without causing a significant movement in the price and with minimum loss of value” and Accounting Liquidity as “a measure of the ability of a debtor to pay his debts as and when they fall due.”
I think that what the guy was getting at is that the great and the good thought that if we print more money then we can introduce liquidity and buy the distressed debt. Yeh, great, but all that achieves is that some other sucker (the tax payer) owns the debt.
The Economist this week mentioned again that all that has really occurred since the financial crisis is that the private debt which the banks owned has become public debt.
So in the opinion of both BBC expert and The Economist the debt has not gone away. The BBC expert said that some countries (implicitly Greece and Ireland) do not have the resources to repay their debt and merely giving them loans from the EU does not change this.
I believe that free market capitalist theory says that when the debtor cannot repay then the debt is written off and the lenders lose their money. It is easy to scoff that the money is lent by a lot of rich institutions but we must remember that in many cases these institutions are the pension funds of ordinary working people.
So what is to be done?
I have heard that Argentina defaulted on its debt in 2002 yet my recollection is that The Economist has had some good things to say about its economy recently. Iceland also hit troubled times and let its investors face write offs yet an Economist article on Ireland cagily suggested that Ireland could learn a thing or two from the way Iceland handled its crisis.
It seems that all the “experts” are suggesting that the debts be written off. Yes, the lenders (read your pension funds and rich bastards) will lose out in the short term but perhaps this is no worse than dragging the problem out for years and arriving at the same conclusion years later.
So why are the debt not being written off? In whose interest is it to maintain bad debt on a companies book?
Ah yes, The Bankers. It is in the interest of the bankers to pretend that the idiotic loans which they made will eventually come good because it make the banks balance sheet look better and therefore gives the CEO some leverage in bumping up his already considerable salary.