Monday, April 29, 2013

"In place of austerity, what comes next?"

From Trust Your Instincts:
In his Wall Street Journal Heard on the Street column, Simon Nixon looks at the question of "in place of austerity, what comes next?"

The simple answer to Mr. Nixon's question is the combination of the Swedish Model with fiscal stimulus and an end to monetary policies like zero interest rates and quantitative easing.

Regular readers know that a modern banking system is designed to absorb the losses on the excess debt in the financial system.  Under the Swedish Model, banks are required to perform the role for which they are designed.

Specifically, banks recognize upfront the losses on the excess debt.  Each borrower's debt is reduced to a level where the borrower can afford to make the debt service payments.  At the same time, the write-down is limited so that it does not create any equity for the borrower.

With the banks absorbing the losses on the excess debt, the burden of servicing this debt is removed from the real economy.  Capital that is needed for growth, reinvestment and supporting the social contract is no longer diverted to debt service.  As a result, the real economy begins to grow again.

To boost the recovery in the real economy, there should be some fiscal stimulus.

To further boost the recovery in the real economy, monetary policy must be changed to eliminate all the economic headwinds that it is currently creating.  These economic headwinds were triggered by reducing interest rates below Walter Bagehot's minimum threshold of 2% and include for example the Retirement Fund Death Spiral. 
That last bit is a real problem that I've not seen Mr. Bernanke or any other Fed Governor address: How are public employee union pension funds going to meet their contractual obligations when the 10-year yields less than 1.7%?
As for the banks recognizing their bad loans we have this from 2009:

Obama: Swedish Model Would Be Impossible Here
From ClusterStock:
Eventually the government might be forced to nationalize a large swath of the banking sector, but they'll be dragged kicking and screaming. Yesterday's non-bailout announcement aimed to preserve the status quo, and Obama himself dismissed the idea that the US could adopt the Swedish model in an interview with ABC...

The Swedish Model

As the [college] site that I lifted the picture from said:

(okay, sorry we know its tacky)