How can excess indebtedness be avoided?

- "Excess indebtedness always leads to a serious economic and financial crisis (as we saw in the early 1990s, the early 2000s and since 2007). What accounts for excess indebtedness? The fact that borrowers link their borrowing capacity to the present value of their income, their wealth and interest rates, and not to the future values of these variables, which can be unfavourable."
- "So to avoid excess indebtedness, the risk premium in the calculation of borrower solvency (and hence of the maximum acceptable indebtedness) must be increased. If banks and financial markets do not do so spontaneously, the government can do so by taxing credit, only during expansion periods and of course not in periods of sluggish growth or low credit growth, either through banks (which will then include the tax in the cost of the loan) or through borrowers."
- "The counter-cyclical bank capital ratios proposed currently by the Basel committee may play this role."

Natixis Flash Economics 420 20100827

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