"When Central Banks create money, banks lend it out. When Central Banks recklessly crate money, banks recklessly lend it out. When Central Banks flood the markets with liquidity, then bankers flood the markets with debt. It is an economic miracle until Debt comes calling."
Source: When Debt comes calling, Sarel Oberholster, Mises
"Simple" facts to remember:
- Debt has to be repaid sooner or later
- Future repayment ability depends on the cash flow ability and the price of the underlying asset
- If asset hyperinflation occurs (e.g. real estate in the US, the UK and Spain; stock markets in 2007(securities lending of hedge funds!), EBITDA multiples) many bankers will unfortunately heavily rely on the value of the underlying asset to liquidate the debt
- Even low wealth debtors are encouraged to speculate
- The level of debt absorption under these conditions is inflated
- If interest rates are very low they become more irrelevant in the whole equation and the focus is shifted to the repayment of the inflated capital portion
- If prices of underlying assets start to plunge - when the bubble bursts - we have the mess...
Many people are requiring more regulation due to the financial crisis we are in. Looking at the mechanics above few non-regulatory measures would probably do:
1) Tighter money supply of central banks in the future. Re-focus on avoiding asset hyperinflations
2) A functioning financial system where distressed owners of assets are bailed out by better positioned private players (they are currently waiting as many asset prices are still distorted by central bank's policy)
2) Education of commercial bankers (supervised by their respective BoD): implementation of credit systems which take into account that both asset prices and cash flows can vary over time (even in a non-inflationary environment)
3) Incentive systems which focus on longer term performance of a banker
Here is the article http://mises.org/journals/scholar/oberholster.pdf
