In the Old Testament Book of Leviticus, God commands the children if Israel to observe a Jubilee every 50 years. Nowadays, we tend to associate the word with celebrations of royal anniversaries such as Queen Elizabeth's golden jubilee in 2002. But the biblical conception of a jubilee was more precise: that of a general cancellation of debts.Much of the article walks through what we know -- we took on too much debt and now we are screwed: "Excessive debt is the key to this crisis; it is the reason we are confronting no ordinary recession." The numbers are familiar, tedious even, if comprehensive. What to do about it? He doesn't know, and suggests no one else does either. "What makes this crisis of burning interest to financial historians is the knowledge that we are witnessing a real-time experiment with not one but two theories about the Depression." Bernanke is doing a Friedman while Paulson's channeling Keynes. The bulk of the article drives us to this question: "Is it really plausible that the cure for excessive leverage in the private sector is excessive leverage in the public sector?" He lays it out:
The alternative must surely be a more radical reduction of debt. Historically, such reductions have been done in one of four ways: outright default, restructuring (for instance, bankruptcy) inflation or conversion.Mass defaults and bankruptcy "are not a pretty prospect." Agreed, especially when the collateral damage to the real economy, the very sectors of the economy we'll need when we reach the far shore and start to rebuild, will be catastrophic. Ferguson's preferred option is then "conversion" whereby mortgage debts are converted into longer-term low interest rate loans. It is here where he loses me: isn't this a form of restructuring? And additionally, the logistics of piecemeal restructuring would be a nightmare. And why stop at mortgage debt? What about credit card debt? What about the debt at all those autoparts suppliers? Who's going to play God in all this?
His treatment of inflation as a solution is disappointing:
Inflation, ..., is hard to worry about in the short term, not least because the Fed's expansion of the monetary base is leading to no commensurate expansion of the broad money supply;Fair enough, but it is just as fair to ask why he doesn't look how most countries induce inflation: via devaluation. That's how non-reserve currency countries do it (and thereby cut their debt burden) and that's how FDR did in the 30's. In this regard, the problem isn't "new" (as he insinuates); rather, what is new is the fact that we now live in a world of fiat currencies backed by nothing and therefore there is no reference system against which the US can now easily devalue. A paradigm gap plagues the debate. This too, in time, shall pass.
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