Daily Archives: March 29, 2010

By Peter Bofinger

The “too big to fail” problem, one of the most negative consequences of the financial crisis, has become more severe than ever. Governments all over the world, with their comprehensive rescue packages for aiding banks, have strengthened their implicit commitment to save financial institutions and their lenders at any price. Therefore, for investors it is becoming less necessary to distinguish between banks of different quality. One simply invests money at the bank which offers the highest interest rate. 

By Alistair Milne

Debt is a drug. High levels of debt used for unproductive purposes result in a temporary economic high. But after the high there is the inescapable low. Who should pay the bill when it eventually comes due? Should it be the debt user, for eagerly borrowing more than they can comfortably repay? Should it be the debt provider, for knowingly supplying more debt than they can reasonably expect to be paid back? Or should others rally round to help reduce the burden?

The struggle by Greece to repair its public finances is a big challenge to the European single currency. But the underlying question is no different from other previous debt crises, such as Imperial Spain in the 16th and 17th century, Latin America in the 1980s or most recently in US subprime mortgage lending. Who pays?