Silicon Valley Watcher - conversations and observations at the intersection of technology and media

I couldn't agree more with the following essay on the current economic crisis from David Roche, submitted to the ACTA Open dialogue: Using public debt to fund private debt delays the inevitable and could extend the economic recession.

There is too much comparison of the current situation with the period of the Great Depression and the Japanese economic problems of the 1990s. Mr Roche states that "We have created our own very serious, but quite unique, mess."

Using public debt to prevent deflation of assets will extend the current crisis. A better approach:

. . .forcing the banks to write down their assets to market and take the hit to shareholder capital before recapitalization begins. Without this, there is no way of knowing how much capital is needed and no telling which institutions are solvent or distinguishing between good and bad banks.

In the US, about 90 per cent of all the measures to deal with the credit crisis aim to prevent asset prices falling to market levels, at which they would clear. The balance sheets of borrowers and creditors will remain encumbered by dud assets and liabilities, slowing the resumption of credit expansion and risking stagnation of the process of intermediation between saving and investment.

It is a hard pill to swallow but it must be swallowed if we are to reset our economy.

Also, I continue to be amazed at all the economic experts that come up with bailout packages of one kind or another. It seems clear to me that none of them, including our chief regulator, Alan Greenspan, have a good grasp of how the economy functions\. Mr Greenspan's recent visit to Washington was astounding, he admitted that there was a serious flaw in his understanding of financial markets! For forty years he and his staff "regulated" the US economy based on faulty assumptions!

YouTube - I Was Wrong! Alan Greenspan

Since no one really knows how things work the best thing to do is to let the economy correct itself without interference.

That means we write down the inflated assets, and take the bitter pills, and let the economy unwind its huge leverage, and then we can clearly see where the economic stimulus packages can be applied. Trying to fix things based on assumptions can only make things worse, imho.

Here is the full essay Thrift is the Future: Interventions will only Prolong the Credit Crisis by David Roche: