Regular readers know we have not tried everything. Specifically, we have not tried disclosure as specified under the FDR Framework.
Instead we have tried any number of policies that have failed, but not before the regulators have gone out of their way to say how everything is ok (for example, bank stress tests).
Since the regulators' credibility vanished when the banks needed to be bailed out at the start of the solvency crisis, market participants have been in a trust, but verify mode. The only way to instill confidence in these market participants is by allowing them to verify the facts and conclusions for themselves.
[I]s there anything that can still be done to douse the economic flames?
The prevailing narrative is that there is not. We’ve chucked everything up to and including the kitchen sink at the problem, and it’s just not working.
Interest rates have been cut close to zero, the money-printing presses have been put on overdrive, the bankers have been bailed out, and governments have let rip with unfunded deficit spending. Yet still output remains below pre-crisis levels across many Western economies, with growth now unambiguously stalling. Nothing seems capable of lifting us out of our post-bubble funk. Policymakers are all out of ammo.Except of course for the magic bullet of disclosure. With disclosure, market participants can determine who is solvent and who is not. Who is insolvent and can work their way back to solvency with or without the need for a boost from restructuring. Who is insolvent and their debt should be written off.
Ultimately, it is only when the facts are known to the market participants, that a path forward can be selected.
Sir Mervyn said: “2008 was not the end of the crisis. It was merely one stage in a bigger crisis. We are going through the next stage now.” It will be years before the world economy cures itself of the debt overhang.Without disclosure, how will we ever know if the world economy is cured?
Deprived of the remedy of currency correction, and with no corresponding mechanisms to address the imbalances, creditor and debtor nations are ripping each other apart.No surprise here because there is no agreement on the simple question of how much capital is required to return all the debtors to solvency? The role of disclosure is to answer this question because the answer is based on knowable facts.
It is a necessary step to answer this question before addressing the question of what are the sources of this capital.
As Sir Mervyn says, some way of bringing them together, some sort of agreement on burden-sharing, must be found. We need a global solution, similar to that struck among G20 nations in the early stages of the crisis. This process will not be kind to savers and creditors. One way or another, they are being made to pay for the profligacy of those who have spent beyond their means. Yet such a transfer is the only way of bringing the crisis to a meaningful resolution.