A worth reading article by Nobel Prize winner , Paul Krugman, on US and world economy which is showing the signs of slipping again. He has been persistently arguing to keep the Monetary Policy easy and forgive the mortgages for people who are under water. It may sound unfair to some, but he argues that there is no other way out. some excerpts from the article; ( F. Sheikh)
What, after all, is our fundamental economic problem? A simplified but broadly correct account of what went wrong goes like this: In the years leading up to the Great Recession, we had an explosion of credit (mainly to the private sector). Old notions of prudence, for both lenders and borrowers, were cast aside; debt levels that would once have been considered deeply unsound became the norm.
Then the music stopped, the money stopped flowing, and everyone began trying to “deleverage,” to reduce the level of debt. For each individual, this was prudent. But my spending is your income and your spending is my income, so when everyone tries to pay down debt at the same time, you get a depressed economy.
So what can be done? Historically, the solution to high levels of debt has often involved writing off and forgiving much of that debt. Sometimes this happens explicitly: In the 1930s F.D.R. helped borrowers refinance with much cheaper mortgages, while in this crisis Iceland is outright canceling a significant part of the debt households ran up during the bubble years. More often, debt relief takes place implicitly, through “financial repression”: government policies hold interest rates down, while inflation erodes the real value of debt.
Why are debtors receiving so little relief? As I said, it’s about righteousness — the sense that any kind of debt forgiveness would involve rewarding bad behavior. In America, the famous Rick Santelli rant that gave birth to the Tea Party wasn’t about taxes or spending — it was a furious denunciation of proposals to help troubled homeowners. In Europe, austerity policies have been driven less by economic analysis than by Germany’s moral indignation over the notion that irresponsible borrowers might not face the full consequences of their actions.
So the policy response to a crisis of excessive debt has, in effect, been a demand that debtors pay off their debts in full. What does history say about that strategy? That’s easy: It doesn’t work. Whatever progress debtors make through suffering and saving is more than offset through depression and deflation. That is, for example, what happened to Britain after World War I, when it tried to pay off its debt with huge budget surpluses while returning to the gold standard: Despite years of sacrifice, it made almost no progress in bringing down the ratio of debt to G.D.P.