What is creating the financial panic that is unfolding as I write, what is causing the shares of all financial institutions to collaps, is the simple fact that Wall Street does not know the extent of the damage to the quality of the mortgages that financial institutions own. As Morgan Stanley and Goldman Sachs follow Merrill Lynch, Bear Stearns and Lehman Brothers on a path to extinction that will cost the US economy dearly, isn´t it time that the US government really intervenes? What the US government has to do is a Brady Plan on itself. What worked for Latin America in the 80s can work now for America itself. It simply entails guaranteeing the majority of the principal and interest from those mortgages. And what was fantastic about the Brady plan is that the guarantee cost nothing to the US Treasury then. And, in my view, the same would be true now. Most of the mortgages in the States will be repaid over the next decades.

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Martin Olivera on September 17, 2008  · 

I am not sure that Brady Plan has wroked as well as you think… Stiglitz agree

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Andrew Paez on September 17, 2008  · 

The last thing I am is a finance expert, but a brief review of wikipedia’s explanation of Brady Bonds, as linked in your blog entry, would indicate that these bonds are usually, but not always, “collateralized by specially issued U.S. Treasury 30-year zero-coupon bonds.” To this American taxpayer, that means me and my progeny are on the hook for repayment of these bonds should debtors default. It occurs to me that if we intend to subsidize these large financial companies we should simply make it part of US policy such that the American people know it up front, as opposed to piecemeal fixes and patches made while in the lurch of devastation. Then the US electorate can have an open debate on whether we want to be in the business of subsidizing “free market” firms engaged in open competition with others of their ilk who may or may not be subsidized by their respective governments. It is particularly interesting to note that while all of this gnashing of teeth is taking place over firms considered “too large to fail,” very little is being done to work on the regulatory side of this issue to preclude its recurrence. So it appears to me that my tax dollar continues to be at risk for the next round of financial irresponsibility on the part of market makers who operate safe in the knowledge that, if they’re big enough with substantial investments and investors, Uncle Sam will come swooping down with untold billions to provide a safety net. All while many of my fellow Americans figure out how to pay for their next emergency room visit because they haven’t the insurance to pay for a standard doctor’s office appointment. Good, thought-provoking article, Mr. Varsavsky. Thanks for the comment space.

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Steve on September 18, 2008  · 

very exciting statement, very interesting statement. esp. YOU as an extreme captalist of its own is crying loud for monetary intervention of government. No! I can´t believe that! So your credo is easy to recognice for everyone:

making profit for yourself! sharing losses with the gov = the people! who cares! right, boy! you are going 2be ridiculous… aren´t you?

3.0 rating

Martin Varsavsky on September 18, 2008  · 

@ Steve:

Steve, this is not about me. I am already well off after 3 exits from my former companies, this crisis finds me without debt and with a highly diversified portfolio that guarantees my well being and that of my children and the grandchildren one day I will have. Even in my latest venture, Fon, we have no debt and our cash burn has been reduced from over a million euros a month to slightly over 300K and falling, and we have no debt. So this comment Steve is about you and all those people out there who are not well off and may lose their jobs because of some poor handling of the housing bubble. Yes there is a housing bubble, mostly in the States, and yes it is a problem, but if this problem gets out of control and most financing dries up a lot of people will lose their jobs.

yani on September 18, 2008  · 

I totally agree with Martin : it is a (n american) ‘dream’ – or better misconception – to believe that the market will correct itself, the power of the market-neoclassic blah.
Not saying Keynes is the answer to all, but it is obvious that in many many cases the market will not cure itself without devastating results. People might argue that correction of the market, no matter the cost, is the cure. True in some way, but after 100s of thousands, if not millions of jobs and assets of people have been ‘corrected’ – what’s the sense of all this.
Also, it seems certain that a lot of cooperation that are in bad shape but still able to do buisness might fail as well.

as Martin said: it all comes down to that secretary @ Lehman who has been there for 20 yrs and has all her/his retirement plans, assets connected to Lehman stocks. It’s not so much about the Bills (to borrow from Fon 🙂 ) whose assets have shrunk by 30% from 1 billion to 700 million.

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