In a Bloomberg/Businessweek article, economics professor Perry Mehrling offers a possible solution to Europe's "doom loop" of weak banks and weak governments. An excerpt:
"Economist Perry Mehrling of Columbia University’s Barnard College has a bold idea that began as an out-of-the-box thought experiment and is slowly evolving into a real proposal. He wrote about it on the website of the George Soros-supported Institute for New Economic Thinking, where he is a senior adviser. He told me today that “it has definitely been inserted into the conversation at the highest level. What they’re doing with it, I don’t know.”
The idea is to make a clean break between the two “swimmers,” banks and governments. Raise a big pool of private money (a “special investment vehicle,” or SIV, in finance lingo). Then use that money to buy up all the government bonds of all the banks of the euro zone. That would take trillions of dollars. Buying the bonds at their actual market value, rather than their face value, would force the banks of Spain, Italy, and other countries to recognize huge losses. But those losses have already occurred—they’ve just been hidden."
Read the full article.
Prof. Mehrling's research focuses on the foundations of monetary economics and the history and applications of monetary economics and finance.