A Systemic Solution to a Systemic Crisis: Do It Right or Don't Do It

[Roland99]

A Systemic Solution to a Systemic Crisis: Do It Right or Don't Do It
http://www.rgemonitor.com/10006/Finance_and_Banking?cluster_id=12976

# Roubini: Any solution to deal with economic overindebtedness must entail a reduction in the face value of the debt outstanding especially for households on the ropes and who have a strong incentive to just walk away which would be the worst outcome for borrowers, lenders, and investors--> Efficient HOME (Home Owners’ Mortgage Enterprise) 10 step plan includes a combination of purchasing illiquid assets at a discount with restructuring/loan modification option in exchange for equity warrants.

# Strauss-Kahn: Systemic crisis calls for systemic solution with three elements: liquidity provision; purchase of distressed assets; and capital injections into financial institutions. There is also a deeper structural issue to be resolved regarding regulatory failure and rating agency reform.

# Martin Wolf: criteria to be used in judging the intervention: First, it would deal with the systemic threat. Second, it would minimize damage to incentives. Third, it would come at minimum cost and risk to the taxpayer. Not least, it would be consistent with ideas of social justice.--> The fundamental problem with the Paulson scheme, as proposed, is then that it is neither a necessary nor an efficient solution.

# cont.: to do instead: The simplest way to recapitalize institutions is by forcing them to raise equity and halt dividends. If that did not work, there could be forced conversions of debt into equity. The attraction of debt-equity swaps is that they would create losses for creditors, which are essential for the long-run health of any financial system.

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