Brilliant idea points to prosperity when risk is socialised

From Dr Robert Madsen.

Sir, Jeffrey Sachs (“Greece’s prophets of gloom are naive and wrong”, July 1) argues that Greece could avoid default on its sovereign debt if only the European governments, the European Union and the International Monetary Fund agreed to lower the interest rate Athens must pay on its financial obligations to German levels. In short, he thinks that official action should eliminate the risk premium that Greece currently bears.

This is a brilliant idea. Since Portugal and Ireland face similar funding difficulties and represent a comparable threat to the common currency, they too deserve the privilege of shifting their risk to broader Europe. The same is true of Spain’s private sector borrowers, many of which cannot afford to roll over their debts in today’s risk-averse capital markets and therefore have an irrefutable claim to subsidies from more frugal countries. The solution could also be applied to the American household sector. If US homeowners were permitted to service their enormous mortgages at, say, the Fed funds rate of almost zero, bankruptcies and foreclosures would diminish sharply and consumption and gross domestic product growth improve.

Sceptics will, of course, dislike this idea. They will argue that it was the underpricing of risk that led to the bubbles in the US, the UK and the EU in the first place and hence that Professor Sachs’ proposal might cause future problems like the 2008-09 crisis and the present European troubles. But surely these are mere cavils. As any expert on the reform of previously communist economies knows, countries prosper when all risk is socialised.

Robert Madsen,

Senior Fellow,

Center for International Studies,

Massachusetts Institute of Technology,

Cambridge, MA, US

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