What Is To Be Done?

Niall Ferguson worries about the rebirth of Keynesianism:

The solution to the debt crisis is not more debt but less debt. Two things must happen. First, banks that are de facto insolvent need to be restructured--a word that is preferable to the old-fashioned "nationalization." Existing shareholders will have face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalization after losses have meaningfully been written down ...

The second step we need to take is a generalized conversion of American mortgages to lower-interest rates and longer maturities...

The idea of modifying mortgages appalls legal purists as a violation of the sanctity of contract. But, as with the principle of eminent domain, there are times when the public interest requires us to honor the rule of law in the breach. Repeatedly in the course of the nineteenth century, governments changed the terms of bonds that they issued through a process known as "conversion." A bond with a five per cent coupon would simply be exchanged for one with a three per cent coupon, to take account of falling market rates and prices. Such procedures were seldom stigmatized as default. Today, in the same way, we need an orderly conversion of adjustable rate mortgages to take account of the fundamentally altered financial environment.

I don't have the expertise to judge such an argument. But I'm happy to air dissents. My good faith attempt to make sense of the stimulus package is here.