Readers know that the Japanese model for handling a bank solvency led financial crisis adopted by the EU, UK and US at the beginning of the current crisis postpones indefinitely dealing with debt in excess of the borrower's capacity to pay.
By calling for fresh tactics, the experts are calling for dropping the Japanese model and adopting the Swedish model for handling a bank solvency led financial crisis.
Under the Swedish model, the issue of too much debt is explicitly addressed. Banks are required to recognize the losses on the excesses in the financial system. What this means in practice is that banks absorb the losses on the debt in excess of the borrower's capacity to pay.
The amount of money thrown at rescuing the world economy since the Great Recession began is truly staggering, probably more than $14 trillion, and the financial spigots are still open....
But can all this money restore growth to robust levels anytime soon?No. This blog has covered numerous reasons why the Japanese model and its related policies (like zero interest rates and bailouts) does not work.
Government officials and economists point to the same problem: too much debt.
Rescue funds and central bank stimulus measures are just keeping the world economy afloat until the hard and painful work of repairing balance sheets gets done.
"The real solution has to do with the fiscal and structural reforms that address the real causes of this crisis, particularly in Europe, but also elsewhere," said Tharman Shanmugaratnam, Singapore's finance minister and head of the IMF's steering committee.
"The firewall is absolutely essential, but by itself it is not sufficient, and the real solutions require attention."Before balance sheets can be repaired, the size of the repair must be known.
Under the Japanese model, financial regulators are blessing banks hiding losses on and off their balance sheets. As a result, no one knows how big of a repair is needed.
Under the Swedish model, banks would stop hiding losses and instead recognize these losses. Then, banks would use future retained earnings to repair their balance sheets and rebuild their book capital levels.