World's burst-bubble economy

Reviving the world's burst-bubble economy seems further away than ever
In the US and in Ireland, governments have been scrambling again to support their banks.

By Ian Campbell, breakingviews.com

Last Updated: 6:25PM GMT 16 Jan 2009


For the economic prospects of these countries, and the world economy, that is troubling. Recession is only just beginning and yet many banks are holed.
Governments are being obliged to pour in more capital, adding to the huge liabilities they now face. This vicious circle augurs poorly for recovery.
It is not that governments should avoid intervening in banks. They are obliged to. To put public money into the banking system is the right thing to do because neither national economies nor the world can afford the collapse of large financial institutions.
Moreover, fresh losses at banks will make them more risk-averse and less inclined to lend into the economy, excerbating the recession. Economic recovery needs credit and the banks need economic recovery.
To restore their financial positions, banks must continue the retreat from high leverage and risk. But the large amounts of public money poured into them do not automatically mean they will be quick to lend more.
At present, neither is in a strong position to help the other. On the contrary, recession and low-growth risk are creating further asset losses for banks - and further recourse to government budgets already under huge strain.
Had Anglo Irish Bank become insolvent, the Irish government, whose fiscal deficit is already heading towards double digits, would have been liable for some 100bn euros in deposits - about half of Ireland's GDP.
The Irish government has guaranteed deposits in all its banks but could not afford to honour that guarantee without issuing debt that would far exceed the country's GDP. It is improbable anyone would want to buy it. Nor can Ireland resort to the money printing press for funding, as the US and UK governments may eventually do. Ireland no longer has its own pounds to print.
The worst afflicted banks are in countries which have experienced property price bubbles, like the US and Ireland. But as recession bites, more loans in more sectors and in more countries may turn bad.
All this makes it likely that governments will be forced to print more money. At present, central banks are buying financial assets but not directly funding governments. Before long, however, they may be forced along that sorry path - the same one traveled in the past from Argentina to Zimbabwe.
It's not yet the time. But monetising bad debt and devaluing paper money may in the end be the only way of reviving the world's burst-bubble economy.



http://www.telegraph.co.uk/finance/breakingviewscom/4272951/Reviving-the-worlds-burst-bubble-economy-seems-further-away-than-ever.html