With break-up of austerity front, dealing with excess debt finally becomes an idea whose time has come

With the rebellion of the European voters against austerity, dealing with the excess debt in the financial system has finally emerged as the idea whose time has come.

The question is 'how to deal with this excess debt'?

The answer is 'by adopting the Swedish model and having Wall Street rescue Main Street'.  As laid out in my blueprint, this involves:

• Requiring the banks to recognize all the losses on private and sovereign debt hidden on and off their balance sheets;

• Requiring the banks to provide ultra transparency and disclose on an on-going basis their current asset, liability and off-balance sheet exposures to show that all losses have been recognized;

• Supporting the banks while they repair their balance sheet through retention of future earnings by guaranteeing their deposits and unsecured debt (for weaker sovereigns, their guarantee should be backstopped by entities like the EFSF, ESM or IMF); and

• Providing the banks with unlimited access to central bank funding to the extent they have good collateral. 

Taking these actions will produce a number of positive benefits including:

• Banks absorb the losses on the excesses in the financial system and modify loans to reflect the borrower's ability to service the debt (this restarts the economy by lifting the burden on the real economy of carrying the excess debt);

• Market participants exert discipline on the banks' risk taking by rewarding low risk banks and penalizing high risk banks; and

• Regulators piggyback off the ability of the market participants to analyze the disclosed information and step in as necessary to maintain financial stability.