Post by account_disabled on Feb 28, 2024 5:09:48 GMT -5
If this diagnosis is correct, what next for policy prescription? There are four ways to deal with over-indebtedness. One is to do nothing and hope things turn out well, which is to accept slow growth at best and risk a downward spiral at worst (since slow growth can exacerbate debt problems). . Another is fiscal stimulus in combination with structural reforms, as my colleague Robin Harding advocates, as a way out of the quagmire. The hope is to boost growth fast enough that the debt overhang becomes more manageable and no longer drags the economy down. However, if the debts are large enough, if the gap between how wealthy people thought they were before and what they now realize they are is too large, then the first two approaches won't work. That leaves the last two: restructuring debts, either through bailouts or write-downs. Bailouts mean that all creditors receive what they are owed, because someone, the central government in this case, in one way or another gives the debtors the money they need to ensure that this happens. Write-downs mean that some creditors have to account for losses on their claims. But economically speaking, both achieve a reorganization of the balance of the national economy, that is, it reorganizes the liabilities and assets of various economic actors among themselves.
That means that both meet the same crucial objectives, which are to strengthen debtors' finances and eliminate uncertainty about the value of financial assets especially credit rights. Japan, the US and the Job Function Email Database eurozone made the same mistake of waiting too long to bite the bullet on the need to restructure balance sheets. Even those that finally did, for too long opted to manage balance sheets through bailouts rather than writedowns. That led to a severe, sometimes fatal, rise in public debt, hence the need for bailout funds for several eurozone sovereigns and the toxic political standoff between creditor and debtor economies within the European monetary union. As a veteran observer of the transatlantic debt crises of 10 or 15 years ago, I hope that Beijing, at the very least, does not repeat the mistakes of the West. So far, the signs are not good, but there are glimmers of hope, such as the inspection of local government balance sheets. More importantly, the central government is in a much better fiscal position than Western governments: it has enormous net wealth abroad, which could be transferred to whoever wants to fill a hole in the balance sheet.
The rescue route is open for this. But should Beijing accept it? While it would clear the decks and free people to lend, invest and plan long-term projects again, driving growth, it would encourage them to do things just as they did before. We could then expect the same results, namely a new period of property-led growth before ending up in the same situation as today, but without the huge war chest of central government to repeat the trick. My opinion is, therefore, that the sooner the balance sheets are restructured through write-downs, the better. The difficult policy and political choice you will have to make is who you will force to bear the losses: local governments, banks, investors or households. In each case, you must have a plan for how to move forward. You need to organize what happens to a bankrupt local administration (and its officials. New, well-capitalized banks are needed to populate the banking system. It must compensate innocent victims among households, at least those who are too poor to bear the losses they face. But if it does, it will be much cheaper than a bailout and, unlike other policy paths, it will prepare China for renewed, perhaps higher quality, growth.
That means that both meet the same crucial objectives, which are to strengthen debtors' finances and eliminate uncertainty about the value of financial assets especially credit rights. Japan, the US and the Job Function Email Database eurozone made the same mistake of waiting too long to bite the bullet on the need to restructure balance sheets. Even those that finally did, for too long opted to manage balance sheets through bailouts rather than writedowns. That led to a severe, sometimes fatal, rise in public debt, hence the need for bailout funds for several eurozone sovereigns and the toxic political standoff between creditor and debtor economies within the European monetary union. As a veteran observer of the transatlantic debt crises of 10 or 15 years ago, I hope that Beijing, at the very least, does not repeat the mistakes of the West. So far, the signs are not good, but there are glimmers of hope, such as the inspection of local government balance sheets. More importantly, the central government is in a much better fiscal position than Western governments: it has enormous net wealth abroad, which could be transferred to whoever wants to fill a hole in the balance sheet.
The rescue route is open for this. But should Beijing accept it? While it would clear the decks and free people to lend, invest and plan long-term projects again, driving growth, it would encourage them to do things just as they did before. We could then expect the same results, namely a new period of property-led growth before ending up in the same situation as today, but without the huge war chest of central government to repeat the trick. My opinion is, therefore, that the sooner the balance sheets are restructured through write-downs, the better. The difficult policy and political choice you will have to make is who you will force to bear the losses: local governments, banks, investors or households. In each case, you must have a plan for how to move forward. You need to organize what happens to a bankrupt local administration (and its officials. New, well-capitalized banks are needed to populate the banking system. It must compensate innocent victims among households, at least those who are too poor to bear the losses they face. But if it does, it will be much cheaper than a bailout and, unlike other policy paths, it will prepare China for renewed, perhaps higher quality, growth.