Pleiades sent in this link here. This bit caught my eye because in Europe they're talking about recapitalising their banks.
SK: There’s no sense trying to recapitalise the banks if you are also trying to maintain the debt they have currently issued and continue having the debtors have to repay that debt. If they’re talking about instead doing what’s now happening with Greece where they’re going to abolish about 50 per cent of the debt, that’s much more sensible. Basically the amount of money which was generated by lending activity of the banks was most drastically excessive. They made a mistake and they basically have to wear the consequences of it and that therefore means writing off the debt.
The trouble is it’s also being compliant with an austerity program and the trouble about the austerity program is that that itself bites back on itself by reducing the cash flows that are then needed to pay the government sector, and in fact the end result of an austerity program is that often the budget deficit gets worse rather than better. I would be in favour of wide-scale debt abolition, guaranteeing depositors funds at the same time, putting in mechanisms to mean that people who are genuine savers didn’t get disadvantaged from the whole thing. Fundamentally, it would be a dramatic shift in the proportion of money that was effectively credit money across to being effectively fiat money instead.
AP: What size of a shift are you talking about?
SK: If the finance sector was doing what it should be doing, which is simply providing working capital for the non-bank financial sector and businesses and innovation funds for entrepreneurs and so on, in an American case it would mean reducing the size of the finance sector by a factor of four or five. It’s literally that much too big. Of course it would mean large numbers of finance brokers, finance advisers, bank staff, would be out of a job and I’d be shot for it, but the reality is over time that’s going to happen anyway and I’d just be bringing it on more suddenly. But I’d be blamed for causing it.
And he's talking about a two decade time frame. Basically, we're staring down the barrel of how to solve the problem of too much debt. Everybody has two solutions: Inflate it away by printing money, or default and stiff payments. Neither one is a good option and both give rise to extreme winners and losers scenarios. The main thing that has to be said is that most governments get to such situations, like, say Japan or to a lesser extent the PIGS, America and the UK, because the vested interests of the day win out over the long term health of the national budgets. If people could collectively foresee these problems, then they would have avoided things getting to such points. Instead, what politicians do is that they carry the interests of the day, putting the bill on tab. After a certain amount of years of such bad governance, the small debt problem eventually blows into a big debt problem.
There seems to be a recurring argument about debt that, people who can't repay debts shouldn't be and shouldn't have been allowed to borrow - whether it be subprime loans or money lent to Greece. Then there is the counter argument that perhaps lenders should have been more prudent (there's that word!) in their lending and whatever money is lost should be chalked up to bad lending. i.e the lender should take their lumps. However the truth is that people who are shackled with the debt but feel that they weren't the ones who asked to borrow the money, are rightfully angry that they've been lumped with this debt without their consent. And then there are people who deposited their money into a bank only to find the bank lent it to Greece, and now they might see their banks topple over, who are equally angry about the predicament they find themselves in.
All of this is just to say that the tribulations in Europe over Greece is going to get much worse before it gets better.
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