But this solution will be costly and painful

Of course, inflation is a unfair to effectively absorb all debts not indexed in the economy. The inflation of prices force creditors to accept payments in a devalued currency. Of course, in principle, it should always be possible to address the problems of the financial system without resorting to inflation. Unfortunately, more interest in other solutions, including the injection of liquidity in banks and direct aids to real estate borrowers, it becomes clear that inflation would be more help than a hindrance.

Modern finance was able to create a dynamic of forfeit of complexity so stunning that it brave the usual methods of renegotiation of the debt. Securitization, structured management and other innovations have so linked the various actors in the financial system is virtually impossible to restructure a single financial institution at a time. The system-wide solutions are therefore needed.

The short term, moderate inflation say 6 for two years did not soundness of balance sheets, however, it will significantly simplify problems, by making other less costly and more effective steps. Of course, as the genius of inflation is released from his lamp, several years may be required to him back. No one wants to revive anti-inflation of the 1980s and 1990s struggles. However, unless Governments tackle the problem head-on, we risk a serious decline around the world as never seen since 1930s. Most large global banks are largely insolvent and depend on assistance and permanent government loans to keep them afloat. Even if Governments strive to avoid absolute nationalization of banks, they will be forced to proceed to a second and a third recapitalisation.

When we see the extent of the problems that still need to resolve, including the defaults of several billions of billions of dollars of "credit default swaps" markets, it is clear that the vacuum of the financial system is too large to be entirely filled with taxpayer money.

It is certain that the solution is essentially to allow more banks to fail, while ensuring that depositors are fully reimbursed, but not necessarily the debt holders. But this solution will be costly and painful.

This brings back us to the option of inflation. In addition, a brief surge of moderate inflation would reduce the value (adjusted for inflation) of the residential real estate and would allow the market to stabilize more easily. Without significant inflation, the minimum prices of real estate will probably have to fall by 15 in the United States, and more still Spain, the United Kingdom and in many other countries.

Of course, given the current recession, it will be not so easy for banks to reach an immediate any inflation. It seems that all they can do is avoid the maintenance of a deflation or falling prices.

Fortunately, it is not so difficult to create inflation. Central banks must simply continue to print the liquid to systematically buy government debt. The great risk is that inflation explode and reach 20-30 instead of 5-6. The fear of a mistake of judgment paralyzed the Bank of the Japan for ten years. However, this problem can be resolved easily. With a good communication policy, inflation expectations can be mastered and inflation reduced as quickly as necessary.

All tools will be useful for solving this type of financial crisis which happens only once a century. In the context of a possible global recession, fear of inflation, is like fear measles while there is a risk especially to catch the plague.