DEBT episode 4: The post-bubble economy

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By spending less they have to minimize their debt. It is about financial obligation: the ratio of financial obligation to income, not the debt level. Due to federal government costs cuts, we are lowering the earnings in the economy quicker than we are paying off financial obligation. Now the financial obligation problem is increasing rather of reducing. Public debt only increased when governments rescued banks after 2007, after the bubble of private financial obligation burst.

Video Transcript:

https://www.youtube.com/embed/ctLc31foiZE We have actually seen that our cash is financial obligation which by misusing it, primarily for monetary and housing markets, the reasons are why we are now in a duration of crisis. What should we do now? Many various options are proposed. Since we wear'' t agree on the reason for the issue. Numerous discussions are about the symptoms and not the causes of the crisis. The benefits of lenders or customer confidence. We wear'' t solve anything by making bankers promise to act. Because of households that are deeply in financial obligation that they have to spend more, or. These conversations sidetrack us from the real problems. When we talk about the government deficit, this is specifically real. We appear to have chosen for some reason that the genuine problem is that the federal government is spending excessive. By investing less they have to minimize their financial obligation. Everything will be great again. This is not the case. It is about debt: the ratio of debt to income, not the debt level. Due to federal government spending cuts, we are minimizing the income in the economy quicker than we are settling financial obligation. Now the debt problem is increasing instead of reducing. This is currently underway in several European nations. The 2nd problem is that the concentrate on government financial obligation is inaccurate. Public financial obligation only increased when federal governments saved banks after 2007, after the bubble of personal financial obligation burst. The high public financial obligation was brought on by the crisis and not the cause of the crisis. Personal financial obligation is the cause. And private debt is still high. With low earnings development, it can take decades to bring financial obligation back to a sustainable level. Settling debt withdraws money from the economy, which could mean a decade of recession or extremely low development. Let'' s not forget that it took us 20 years to get the debt to go up like this. For how long would it require to pay it back? It is really most likely that we will not be able to pay back many loans at all given that we are less able to repay them. Numerous loans that we have to pay back remain in all probability already '' bad loans '. We will have to recognize this eventually. Up until we do this, we are in a duration of '' financial obligation deflation ': low development due to deleveraging and declining worths of our assets. An alternative to this horrible scenario is that we are now doing something to decrease the financial obligation concern. Ever given that banks reside on debt, banks will have to diminish. The opposite of unwinding financial obligation is winding down the financial system. All loans remain in the monetary system so a lot of loans implies that the financial system is too huge. This is the factor that we have to bring the banking sector back so that it is back in balance with the economy. Rather of just saving the banks, we likewise need to believe about how to shrink them smartly. If we put on'' t do this, too much cash will stream out of the economy into too big a monetary system to sustain our over-indebtedness. This will continue to keep back financial development. We require to make the banking sector a good trusted firm once again. Something that assists instead of stops our economy. This suggests two things: we need to tackle our high debts from the past and we need to prevent policies from causing banks to over-lend again to blow up the housing and stock markets. So let'' s concur on a minimum of something. This is simple! The next time you hear that we require to reform the labor market or cut incomes or conserve banks. Ask yourself: does this resolve the debt problem? This is frequently not the case. Because business and especially families have so much debt, what is stopping economic growth now is too little investment and demand. For example in the type of home mortgages. Too much income is required to pay off these financial obligations. This money can not be spent in the economy. They have not addressed this issue in Japan. After their houses burst bubble in 1990. This has actually caused decades of low development and recession. If financial obligation is expensive to sustain, our economy will suffer all the more if we disregard this problem. This does not indicate that the contraction of our financial obligations can continue without pain. The loans on the balance sheets of banks are typically where pension funds have invested our savings. This will be at the expenditure of our savings if these loans turn out to be worthless. Put on'' t forget that numerous of these loans are already “” bad loans””. If loans are not paid back that banks get into difficulty, other problems develop. As a result, they also stop supplying productive loans. This is bad for the economy. Even now banks are currently collecting money rather than providing to business. Just as they have actually maintained this in Japan for twenty years. Anyhow, we are in difficulty! It is much better to take our loss than to wait years like Japan. We require to believe carefully about the effects and then separate and safeguard the fundamental parts of the monetary system. Business credits, the payment system and crucial savings functions. It can just take place that the rest of the system will shrink. As soon as we can no longer keep it up with tax money. It is unclear to what extent this is bad for the economy. We are now made to think that we must save banks to save our economy. Much of the banking system had almost nothing to do with the economy. Perhaps we can do without these parts more easily than we inform ourselves now. Either method, keeping such a big banking system is not an option. It is now more than two times the size of a few decades ago. We wear'' t have sufficient earnings to sustain so much financial obligation with excellent growth. Shrinking part of the financial system is for that reason one part of the solution. But this process can take a very long time. In the short-term, we can separate bad financial obligations with a variety of government-led banks and position them in a '' bad bank '. In this way, the banks no longer struggle with these “” bad loans.”” Then provide homes the chance to pay off their debt over a longer duration, if we. Can we help people with high mortgages who are now in difficulty. If home prices are back at the very same level with revenue, a federal government investor can hold these loans for a long period of time and offer. And even if this is not possible, we have to weigh the losses it generates for the government versus the benefits. These type of steps were used throughout the previous Dutch home loan crisis around 1980. In this way we can reduce the big debt concern. It is likewise an obstacle to lead bank loans back to productive purposes. These procedures together can lower the ratio of financial obligation to income. To achieve this, we need to prevent banks from blowing monetary bubbles. With the existing Basel legislation, we can take mortgage or equity loans into account as more risk. As an outcome, they can no longer make too much of this. It is likewise possible, as proposed in the UK, to tax this kind of loan. This prevents this and the government gets more money to minimize its own debt. There are even more alternatives: The most practical is to set up an investment bank. The Germans did this when they founded the Kreditanstalt (KfW) für wiederaufbau in 1948. This is actually a credit institution to reconstruct the economy. The KfW has played an important role in rebuilding the German economy. It continues to do so with presently loans in excess of EUR 70 billion. About a 3rd of this is used to protect the environment and techniques such as solar panels. The rest will be used to invest in projects such as public transport, SMEs and German exports. In this way, credit can add to the economy. At the moment we have a brand-new crisis, the biggest in eighty years worldwide. Will there be another revolution in financial science? Who will acknowledge that we have overlooked something crucial? What will this brand-new economic motion have to do with? In one word: financial obligations Economists have neglected this for decades. This is the revolution in financial science that we require. If this is going to occur, no one is sure. Maybe it has already started and will slowly alter. The stock exchange crash that declared the Great Depression was in 1929. Keynes did not write his book up until 1936. His policy advice was only adopted after World War II, twenty years after the crash. We are just five years later in our fantastic economic crisis. We might need to sit this out longer. At the exact same time, we are cutting back on facilities, health care and education, numerous companies are going under, Unemployment is increasing to levels we sanctuary'' t seen in thirty years, stress within Europe are installing. Let us hope that it is not necessary for us to wait twenty years and fight to leave our crisis. Up until now, economic science has not assist us much. Because we simply overlooked credit and financial obligation, we are so in problem! And by continuing to ignore this, we are burdened by guidelines and '' solutions ' that do not solve the issue. We require to reorganize our high financial obligations so that they no longer keep back our development. We require to better manage banks and monetary markets so that they don'' t produce as much ineffective credit as lots of times. And even better they need to make more productive financial obligations. This is only possible if we begin thinking about how credit and debt determine our economy. As found on YouTube – Creative Commons License

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