Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, March 12, 2009

Universal Chapter 11 Reorganization

As I was driving home listening to yet another depressing hour of NPR, it dawned on me that we might be able to see the "financial crisis" - so called - in a new way. The only large entities that are not effectively insolvent are governments with the ability to print money in currencies that have not yet lost public trust. Insolvency is defined in our law many ways, but among them are "not generally able to pay debts when they come due." That pretty much describes every major institution: GE, Citigroup, California, Ireland, etc. The reason is pretty simple at heart: the nominal value of the debt instruments created and purchased in the past few years exceeds worldwide economic production by dizzying amounts, but their actual value is cascading to zero. The Bank of England yesterday began simply printing money and pumping into the economy (the marvelous name for this is "quantitative easing" - it sounds so soft and gentle). Worldwide stimulus plans are in the trillions of dollars, and the US government is looking at deficits in excess of $1 trillion.

If the developed world were a single firm, it would file for Chapter 11 bankruptcy - a process by which old debts are extinguished, equity redistributed to creditors on a pennies-on-the-dollar basis, contracts are torn up left and right like so much wrapping paper on Christmas morning, and a new institution emerges with enough backing to begin borrowing and spending again. Isn't that really what we're doing? Rebooting capitalism?


Dr. Strangelove said...

While I don't think the "rebooting capitalism" you describe is quite precisely what we are trying to do right at the moment, I think you have described prophetically what the next true revolutions may actually look like!

Raised By Republicans said...

As someone with student loan debt and a mortgage, I'd be all for that so long as my nominal salary would keep up with the result inflation. The problem is the likelihood of my salary keeping with rapid inflation is low so...yikes!

The Law Talking Guy said...

Yes, but your nominal salary would catch up over time, reducing the debt burden substantially. In the interim, the increased cost of goods and services will not hurt you nearly as much as it would if you had to pay (again) for housing and education. Inflation is largely an annoyance if one's primary expenditures are food, gas, and clothing.