MSNBC: Liquidity versus Solvency

Mirtchev, A. (2009, February 28). Liquidity versus Solvency – A choice with profound implications for dealing with the crisis and the recovery period, and, most importantly, for the post-crisis global economic security. MSNBC News.

msnbcDr. Alexander Mirtchev believes the financial crisis and the economic downturn should be approached as two separate issues that have coincided and have mutually reinforcing effects on the global economy. The intensifying government intervention measures undertaken by the developed economies are focused predominantly on addressing liquidity problems, when the essence of the crisis lies in solvency issues. Mirtchev argues that government intervention ignores solvency in favor of liquidity at its own peril, and that such a choice would define the manner in which the crisis would be dealt with. When analyzing the impact of government intervention in specific industry sectors, Mirtchev highlights the danger of “prolonging the agony” when supporting selected companies’ liquidity, rather than addressing their solvency issues. In the final analysis, government intervention will be judged appropriate and successful if it provided a boost to
market confidence within a relatively short time span, and, crucially, encouraged new levels of productivity, competitiveness and entrepreneurship, whilst dealing with the social fallout of the crisis. Looking ahead, how leading economies handle these choices will impact not only the rules of the game, but the philosophy underpinning the global economic architecture.