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Zingales: The Lesser Evil and the IMF to Avoid

With Serious Liberalization Italy Can Make it

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America24, 27 dicembre 2011, 12:26

By Luigi Zingales

Originally published in il Sole 24 Ore.

When a theatre goes on fire and spectators disorderly rush towards the exit, blocking one another, there is a risk of a tragedy. Even a liberalist like me recognizes that it is better for the police to intervene and to force people to exit in an orderly manner. It is the only way to save as many spectators as possible.

This image helps us understand how to come out of Italy's public bond crisis. In most markets negative expectations cannot alter the long-term equilibrium. If too many consumers become (excessively) pessimistic on future potato harvests, potato prices go up.
The price increase reduces potato consumption and increases the supply of potatoes, reducing the price and bringing it back to the original point of equilibrium.

The public bond market is different. If (excessively) pessimistic expectations prevail on the capability of a Country to sustain debt, the interest rate demanded by the market to refinance debt increases.

Read more here.

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