How to Prevent Another Depression – Assignment Example

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The paper "How to Prevent Another Depression" is a perfect example of an assignment on macro and microeconomics. The latest economic data is suggestive of a revisit of the recession in many advanced countries. Financial markets have reached stress levels comparable to the Lehman Brothers’ collapse in 2008. Risks of the financial crisis are significant not only for the private sector but for the almost insolvent sovereigns also. This imparts the need to take serious measures to deter another depression. This can be achieved by first accepting the recessionary effects of the austerity measures on output.

Secondly, the usefulness of credit easing in place of simple quantitative easing should be realized in the case of the limited impact of the monetary policy on the problems of insolvency and excessive debt rather than illiquidity. Third, the under-capitalized Eurozone banks should be empowered for the restoration of credit growth through public financing in a Union-wide European program. Fourth, the importance of the provision of large-scale liquidity for the solvent governments should be identified to deter the spreads’ spike and loss of such access to the market that can transform illiquidity into insolvency.

Countries at risk of losing access to the market need increase of official resources through different actions including the massive ECB action, Eurobonds, and the European Financial Stability Facility (EFSF) so that such sovereigns as Italy and Spain can be saved from a disastrous run (Roubini). Reduction of debt, the transformation of debt into equity, and orderly restructuring of the debt are some of the ways in which debt burdens that can otherwise not be eased through inflation, growth, and savings can be made sustainable.  

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