The Next Revolution in our Credit-Driven Economy

Chapter 4Socialization of Debt after Mismanagement by Bankers (or, Why Keynesian Economics Doesn't Work)

In this chapter, we will focus on one salient point. When bankers try to fund their balance sheets with wholesale funding and create loan/deposit ratios (LDRs) of 1.2 to 1.5, the unwind and the resulting deflationary spiral can and must be stopped or reversed only by governments, which step in to run deficits that are designed to:

1. Recapitalize the banks, which are running losses from bad debt
2. Stimulate an economy that is otherwise going down a deflationary sinkhole
3. Buy or subsidize assets from the private sector banking apparatus

The best way to see how this phenomenon plays itself out over and over again in nearly identical fashion is to use examples. The first example is one in which we have full, complete, and accurate data of the “before and after” in the Asia crisis. This example is Thailand.

Thailand

Thailand can be seen as the eye of the storm, in that the devaluation of the Thai baht on July 3, 1997, seemed to trigger the whole crisis. There was no profound meaning to the events surrounding the devaluation of the baht, other than it was a tripwire that set off a great economic and human catastrophe that was years in the making and that destroyed the financial well-being of millions of families throughout Asia. The factors that contributed to the Asian crisis were similar to those that set off World War I: cronyism, mismanagement, hubris, economic backwardness despite ...