Rogoff & Reinhart and the crowding out of solutions that would end the financial crisis

Whether it is accurate or not, a paper was published that says the 90% debt threshold found by Rogoff & Reinhart was the result of an Excel spreadsheet error.

Regular readers know that your humble blogger previously debunked the implications of their study for how to handle a bank solvency led financial crisis by simply observing that it ignores the creation of a) the modern central bank and b) the adoption of deposit guarantees.

The combination of a modern central bank and deposit insurance makes it easy to handle a bank solvency crisis as the combination makes it possible for banks to operate with low or negative book capital levels.

Simply, banks can both absorb the losses on the excess debt in the financial system to protect the real economy from the burden of servicing this debt and continue to provide the loans needed to support the real economy.

This means that the correct policy response to a bank solvency crisis is the Swedish Model under which banks recognize upfront all their losses on the excess public and private debt.

So why hasn't this policy been adopted anywhere besides Iceland (where it has been highly successful) to address the current bank solvency led financial crisis?

One of the reasons your humble blogger has discovered is that, even when fundamentally flawed, books written by economists from Harvard (This time its different) or Stanford (the Bankers' New Clothes) receive excessive amounts of attention in the mainstream media and from policymakers.

This attention crowds out consideration of alternative solutions, like adopting the Swedish Model, for ending our current financial crisis.