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Pietro M.

This post is a tour de force, but I agree.

I shared the same doubts regarding the ability to pay social security debts by a simple redefinition of liabilities, and regarding the relevance of talking about legal legitimacy instead of economic effects.

A question regarding the 2-2-2.

"Bankruptcy proceedings will be undertaken on all insolvent banks

2. Ensure deposits up to £50,000 are ring fenced
3. Write down bank’s assets
4. Perform a debt-for-equity swap on remaining deposits"

If deposits become equity (and assuming that deposits beyond £50,000 suffice to obtain positive equity, I don't know), inside money is by definition destroyed in the process. Wouldn't it be wildly deflationary?

I'm not against it, I mean, I consider it inevitable, but one consequence is that all prices should fall by some 30% in the process of turning demand deposits into equity shares.

Maybe some deposits would be substituted with credit money (equity shares in mutual funds, for instance), thus reducing the demand for strictu sensu money, but a huge deflation would result anyway.

So far, yours is the most realistic solution of the problem I found. Unfortunately I know almost nothing regarding bankruptcy law and crisis management...

aje

Hi Pietro, thanks for the comment.
I'm not sure i'm better equipped to speculate on this than others, but I would say that the underlying assumption is that this process is a sorting mechanism between solvent and insolvent banks. It doesn't lead to a system wide solution.
The more I read up about the recent financial crisis the more I believe that the likes of Lloyds TSB were pushed from being viable to shaky for political reasons. There may well be a flight of deposits from insolvent banks but this is the point, and this is why you adopt a temporary ring fence.

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