2009 May 31 Sunday
Nouriel Roubini: Convert More Debt To Equity

Nouriel Roubini says we aren't converting enough debt into equity.

However, fiscal policy cannot resolve problems of credit, and it is not without cost. Over the next few years it's going to add about $9 trillion to the US public debt. Niall Ferguson said it's the end of the age of leverage. It's not really. There is not deleveraging. We have all the liabilities of the household sector, of the banks and financial institutions, of the corporate sectors; and now we've decided to socialize these bad debts and to put them on the balance sheet of the government. That's why the public debt is rising. Instead, when you have an excessive debt problem, you have to convert such debt into equity. That's what you do with corporate restructuring—it converts unsecured debt into equity. That's what you should do with the banks: induce the unsecured creditors to convert their claims into equity. You could do the same thing with the housing market. But we're not doing the debt-into-equity conversion. What we're doing is piling public debt on top of private debt to socialize the losses; and at some point the back of some governments' balance sheet is going to break, and if that happens, it's going to be a disaster. So we need fiscal stimulus in the short run, but we have to worry about the long-run fiscal sustainability, too.

I agree about the need to convert debt into equity. I also think piling on more government debt is a bad idea. Roubini also does not expect a rebound until next next year and he considers a double dip recession a possibility. That would bring down more banks as more mortgages defaulted. Check out a take on the total bad debt picture.

Share |      By Randall Parker at 2009 May 31 11:39 PM  Economics Credit

Wolf-Dog said at June 2, 2009 2:47 AM:

In order to convert the debt into equity, it is necessary to find a large number of ultra-rich victims who are willing to lose all their money in exchange for worthless stock. This may not be possible, because the rich are not so stupid.

Engineer-Poet said at June 2, 2009 9:49 PM:

I wonder if this "failure" to convert debt to equity is just kicking the can down the road to avoid recognizing losses because the losses are too big.

If true, it would make Bernie Madoff look like a piker, wouldn't it?

van Helsing said at June 3, 2009 12:13 PM:

Yes. The losses are too big to recognize. Kicking the can down the road is only possible for so long. Then the can starts kicking back.

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