Capitol Hill Blue Forums Political Issues Finance, the economy & Economics How will the financial crisis develop?

Recently, the US government has continued its bailout of stricken financial institutions, even as it mulls a wider rescue of incorrigible corporate entities such as US automakers.

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....those looking for the bailout of G-7 economies to follow Keynesian practices are also barking up the wrong tree. This is because the experience of Japan in the 1990s is more useful, namely that firms with negative net worth will continue to repay debt even if interest rates go to zero, rather than invest in new projects carrying operational risk. The same is true of US homeowners and various others elsewhere in the world.

Debt reduction will in turn continue to cut the global economy's output. This is the "cold turkey" treatment of debt being withdrawn from habitual borrowers, much like taking away drugs from crack addicts. The rest of the world has no reason to support the efforts of the G-7 in keeping their debt addicts in the habit; indeed it has now become economically unviable for Asians to support these borrowing habits across G7. That is what I called the Fukuyama moment in finance (Asia Times Online, October 18, 2008), the idea that the history of financial markets is largely irrelevant now, particularly with respect to the building blocks such as what constitutes a risk-free asset.

The only way out is for G-7 countries to support infrastructure building and government spending in Asian countries, such as China, India and Southeast Asia. These countries have the demographics and the profit potential to repay today's borrowings, and certainly would provide a bigger boost to the global economy than whatever can be achieved by throwing money at folks with negative net worth in the US and elsewhere.