Column : Is the crisis over?

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: get? My worst-case scenario is a much larger intervention by G-7 governments in their banking systems with huge infusions of money for recapitalisation. This is merely a way of government taking over private liabilities on its own books. It is still not quite nationalisation because the shareholders are still being left to cope with the volatility of equity prices of banks, but in some way the systemic capacity to advance credit is being preserved. It is a way of treating the financial system itself as a public good.

How sound are the governments themselves? In the UK, the debt GDP ratio is under 40% by one measure but there are a lot of off-balance sheet commitments thanks to Private Finance Initiative, and one estimate puts the true ratio at around 80%. But the total liabilities of the banking system are 420% of GDP and if the state were to take them over, the viability of the state itself would be in question.

Can sovereign states go bankrupt? During the petrodollar glut, Walter Wriston of Citibank said they could not. Through the 1980s, the Third World Debt problem loomed over the global economy and eventually foreign claimants of Third World Debt were forced to settle at a fraction of the nominal value. But what happens if the debt is all domestic? Then we have to think through the monetary aspects of such debt because the only way the state can pay back its debt is to print money, which it can do in unlimited amounts. Thus the state can never go bankrupt as such but the economy may suffer a sustained regime of inflation. You don’t even have to be a monetarist to believe that when the debt GDP ratio is so high.

Maybe it will not come to that. There are real strengths in the G-7 economies that have to do with the knowledge, the skills and the entrepreneurial ability of their citizens. After all, we have all the technological innovations of the last 25 years still available. Microsoft may go bust, but WORD is indestructible since it is in someone’s head. Maybe the final lesson of the crisis will be that the real strength of any economy is the quality of its human beings.