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Monday, December 22, 2008

Niall Ferguson caves and asks God for help

In the ancient times, when everyone was poor(er), God used to celebrate every seven or fifty years by canceling everyone's debts and wiping out moneylenders, because he loves you and hates Jews. This was called Jubilee. Coincidence!? God obviously failed out of his community college economics course but that's alright. Since the average lifespan was probably 25 or something, moral hazard was limited since everyone was going to die soon anyway.

Niall Ferguson at the FT resurrects the Jubilee option to help solve the US's massive debt problem. The reasoning is that, hey, there's too much debt, so let's not have it anymore. This is less insane than it sounds. The US has become massively over-leveraged* (or 'geared', for you wankers). The public and private sectors of the US have a massive debt stock, and as Fergusson points out, our 'solutions' thus far seem to be merely adding to public sector debt (see sexy charts).

Equally massive deleveraging would 'solve' the problem in that everyone tries to save and pay off their debts at the same time, condemning the country to Great Depression 2: The Reckoning, which wont be as good as the first. This is called the "paradox of thrift", which means that if you're still paying your credit card bills then you hate America.

Ferguson says there are basically four options to reduce the debt:
outright default - "haha, fuck you."
restructuring - "ok, we'll only break one leg."
inflation - "can I pay in lira?"
conversion - "cmon, give me a fuckin' break dude!"
Ferguson opts for conversion, roughly along the lines of plans that tolerable Republicans Sheila Bear and Martin Feldstein have been shopping around forever now. Whenever Obama finishes making out with Rick Warren on inauguration day he needs to just fucking pick one of these already.

This gets to the heart of why this crisis has dragged on for well over a year now. Someone needs to suck it up and actually start realizing losses on their mortgage-backed securities. But they're not going to until they have a general idea of what the bottom of the housing market is going to look like. The two housing plans above would at least throw some predictability into a situation utterly lacking it. Niall Ferguson and God are waiting.

* "Leverage" means indebtedness but sounds hotter and less awful.

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