Daily Archives: September 25, 2008

By Jeffrey Garten

Even if the US’s massive financial rescue operation succeeds, it should be followed by something even more far-reaching – the establishment of a Global Monetary Authority to oversee markets that have become borderless. Read more

by Larry Kotlikoff and Perry Mehrling

The credit crisis is two problems not one, both a liquidity crisis and a solvency crisis, but they are interrelated problems and so too must be the solution.  We can solve both problems at the same time by having the government sell credit insurance policies of all kinds, and accept preferred stock as payment.  The credit insurance will set a floor on prices, and so restore liquidity.  The preferred stock issue will recapitalize banks that suffer from an eroded capital base on account of asset value writedowns.

Problem one is the crisis of liquidity.  One way to think about this dimension of the problem is that everyone wants to sell the assets and no one wants to buy, so the price of the assets is beaten down below fair value.  Another way to think about it is that everyone wants to buy credit insurance and no one wants to sell, so the price of insurance is bid above fair value. Read more

by Daniel Gros and Stefano Micossi

The US financial system is being nationalised. The piecemeal approach followed so far had clearly not been working. Hence the US political system is working overtime to reach a bipartisan agreement on a systemic solution. The centrepiece is already known: the US government is going to buy $700bn (€480bn, £380bn) of the so-called “toxic” assets. More measures are certain to follow as the banks will require recapitalisation to the extent that they make losses. As a result, the US government will soon own a large share of the US banking system. If the details are generous enough, this should be sufficient finally to restore orderly market conditions. Can Europe be far behind? Read more