He is right that there is a difference between illiquidity and insolvency, but

I disagree with the post: Paul Kedrosky: Liquidity versus Insolvency

It all sounds good in theory. Illiquidity is not the same as insolvency.

But the post does not explain exactly how to tell who is solvent but illiquid and who is insolvent but illiquid in a way that cannot be gamed. Why do we think that the government can design a better scheme to do it than anyone else?

Couldn’t I just as well argue that no one has any incentive to do anything now about getting rid of junk—simply because they are waiting for the next bailouts, in which the junk is going to be more valuable than today. Selling only leads you to realize a loss today, waiting to see is more profitable. Now the financial institutions’ expectations are that there will be some bailout in the future, which is making everyone wait.

We are trapped. Heads we lose. Tails we lose 😦

More and more I agree with Allan Meltzer-no bailouts. And now that policy is going to be costlier than otherwise to implement.

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One Comment on “He is right that there is a difference between illiquidity and insolvency, but”

  1. OmegaMom Says:

    I have come to the same conclusion: Bailout=postponement of the offloading and a crash later, no-bailout=crash now. In other words, a big huge humongous mess one way or the other. They’ve *already* been throwing billions of dollars at the mess a bit at a time; that $700 billion will go rapidly. And then what??

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