How can Western governments reduce their debts without implementing austerity programmes? One obvious way is to run a mild inflationary policy (3 to 4%) for a decade This would substantially reduce the real value of the principal which has to be repaid. Another way to reduce the government's debt burden would be to monetise it i.e., have the central bank buy government bonds with newly-created money. At present, the Bank of England holds £375bn of UK government debt. The accumulated interest on this debt (approx. £30bn) has been reclaimed by the Treasury, which ultimately reduces the amount the government has to borrow. In other words, the government is effectively paying no interest on its debt! However, there is an even more radical way for the government debt burden to be reduced - the Bank of England could simply forgive the £375bn debt which it holds! What would stop it from doing so?
Daron Acemoglu, Simon Johnson, Amir Kermani, James Kwak and Todd Mitton have written a paper on whether firms connected to Timothy Geithner benefited from these connections. They do so by looking at how stocks of these firms reacted to the announcement that he was a nominee for Treasury Secretary in November 2008. They find that there were large abnormal returns for connected firms. Below is the paper's abstract and the full paper is available here . The announcement of Timothy Geithner as nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for financial firms with which he had a connection. This return was about 6% after the first full day of trading and about 12% after ten trading days. There were subsequently abnormal negative returns for connected firms when news broke that Geithner's confirmation might be derailed by tax issues. Excess returns for connected firms may reflect the perceived impact of relying on the advice of a small ne...