In A Nutshell: Best Explanation, and Best Solution Yet, for the Credit Crisis

The Longish View tries to be sober, but you can be sober without always being deadly serious.  Scott Adams, the genius artist behind Dilbert, published a cartoon today that explains the credit crisis with deadly precision.  46 words (I counted), and he gets not only the cocktail of dishonesty and incompetence of the underwriters of the toxic debt, but also the willful greed-besotted blindness of the investors.  And it's funny.

What we can laugh at, we can defeat.  The same day Adams published this cartoon, the New York Times published the best solution yet for the crisis.  Stephen Quinn, a professor in the Department of Economics at Texas Christian University, proposes a swap of toxic debt for equity in a holding company whose sole asset will be that debt, all pooled together.  The swap would occur at face value: debt with a face value of $1000 would be exchangeable for $1000 par value of equity in the holding company, regardless of the value of the debt.  After the swaps are done, the equity can trade and the market can set a price.  This brilliantly solves the critical problem of the crisis, which is the continuing uncertainty about the value of all those weird securities weighing down bank balance sheets, the banks' self-interested reluctance to reveal their holdings, and the consequent collapse in liquidity as all the banks refuse to lend to one another because of the uncertainty this all creates.

According to the Times, Professor Quinn gets this idea from the history of the Bank of England and the other chartered corporations, like the East India Company, set up by the United Kingdom in the 17th and 18th Centuries.  His paper on sovereign-debt securitization, which sounds rather dry, is actually an edge-of-your-seat thrill ride.  In it the British monarchy and Parliament, tussling for power and desperate for money to fight wars against the Netherlands, Spain and other continental powers, invent a series of mechanisms for redistributing indebtedness and raising new capital.  You might think it was the story of an empire in terminal decline, perpetually adding new sets of creditors and putting off the previous ones -- but then you remember that all this drama came not at the British Empire's waning, but as a curtain-raiser for the emergence of their global pre-eminence and the Pax Britannica.  For all of us worried about the future of our own country, piling up debts on all sides, that's a thought to bring back a little hope.