Lagarde spells out the ugly truth on debt
http://www.ft.com/cms/s/0/a3ced35e-d193-11e0-89c0-00144feab49a.html#axzz1WMwg32nf
Jackson Hole may be a central bankers’ conference, but the most important thing to come out of this year’s gathering had nothing to do with central banking policy.
Christine Lagarde has said publicly what most policymakers have avoided addressing since the crisis began. Using her new bully pulpit at the International Monetary Fund she has conceded that the common problem facing the developed world is an excessive overhang of claims on debt that financed worthless investments. These claims will have to be liquidated, and the quicker the better.
Ms Lagarde deserves praise for spelling out the problem and issuing a call to action. But to resolve it also requires policymakers to decide where the losses should fall. She thinks they should land on taxpayers; this is wrongheaded. She focused on two big risks: the continuing frailty of European banks, and the continuing house price falls in the US and the growing number of homeowners trapped in negative equity.
Both threaten the recovery. Doubts about the health of European banks, could, if untreated, lead to another credit squeeze. The recent round of stress tests has not dispelled fears that undercapitalised institutions have been banking on a recovery to allow them to retain sufficient earnings to repair balance sheets. Meanwhile, the US mortgage mess crimps consumer spending by saddling distressed homeowners with excessive liabilities and preventing them from moving to where the jobs are.
What is welcome is Ms Lagarde’s willingness to embrace radical responses to both. In Europe, she endorses tougher stress-tests and a more coercive approach to balance-sheet repair. This newspaper could not agree more. In the US, she calls for writing-off more of the principal on mortgages. It will be vital to distinguish between mortgages that were recklessly extended and those that were not.
Where the FT disagrees, is in Ms Lagarde’s willingness to allow taxpayers to act as unpaid lifeguards for the financial system – rescuing the banks if private investors will not. This shifting of risk from bondholders was a bad idea in Ireland and generalising it across the eurozone will not improve it. It would be better to fill capital holes by mandatory debt to equity swaps that put unsecured bondholders where they belong – behind both taxpayers and depositors.
But if Ms Lagarde does not have all the answers she has at least started the debate. Now politicians need to show similar courage and look reality unsparingly in the eye.
————
she is correct..
“claims on debt that financed worthless investments. These claims will have to be liquidated, and the quicker the better.”
everything they do that isnt about ridding the world of these zombie institutions..is just a band aid measure..until they cut their losses..accept the pain..we cannot and will not move on with any confidence..
401
She thinks they should land on taxpayers; this is wrongheaded.
I cannot determine if this is a paradox or simply ironic that the right headed are wrongheaded.
Starting the “debate”, I agree, but to no avail and to what end ?
There is nothing, but debate. Who is going to win the debate and do something now, before it is too late.
yes the rights are wrong..correct