Added Debt Won't Rescue the Great American Ponzi Scheme

Policy-makers not only misunderstand the economic crisis, they continue to underestimate it. Consequently, solutions to date have not only failed to “fix” anything, they have made the problem worse. The problem isn’t falling asset prices, it’s not rising foreclosures, it’s too much debt. With an assist from mark-to-market accounting,* too much debt inflated the asset bubble in the first place. Yves Smith has it exactly right that the only “solution” to this crisis is price discovery, to allow asset prices to fall to whatever level they need to in order for markets to clear. This is bad news for over-levered balance sheets, but there’s nothing else to be done.

And yet American policy-makers appear convinced that more debt can rescue an economy already drowning in it. If we can just keep the leverage party going, all will be well. $787 billion to fund “stimulus,” another $9 trillion committed to guarantee bad debts, 0% interest rates and quantitative easing to drive more lending, new off balance sheet vehicles to hide from the public the toxic assets they’ve absorbed. All of it to be funded with debt, most of it the responsibility of taxpayers.

If I may offer just one reason this will all fail: rising interest rates. Interest rates need only revert to their historical median in order to hammer asset values, and balance sheets, into oblivion. (click on chart to enlarge)

A simple present value calculation suggests that house prices could fall another 30% if mortgage rates get back to 8%.** Enough to wipe out a 20% downpayment made today and still leave the buyer upside down on his mortgage. Given the pile of Treasurys the Obama administration plans to dump on the market, it seems logical to assume interest rates are headed up.

Some might argue that deleveraging is SO violent that a couple years of “stimulus” and other debt-financed rescue measures are needed to cushion the blow. Unfortunately, any positive impact is likely to be offset by upward pressure on interest rates. Perhaps the Fed can monetize a lot more debt. But that will have its own negative consequences.

Picture it if you will: the economy stabilizes, money flows out of Treasurys, which drives interest rates back to normal. Asset values that had appeared to stabilize fall again. More writedowns ensue, more balance sheets turn up insolvent. The debt deflation conflagration ignites again, burning up what’s left of the economy.

If our experience to date has taught us anything it should be that kicking losses up to bigger balance sheets solves nothing. Losses have to be taken. The balance sheets on which they reside will end up insolvent. Why compound our problems by piling up more debt and concentrating all of it on the public’s balance sheet? Is American arrogance so great that we believe our Treasury and our currency will survive the trillions of $ worth of losses and stimulus we’ve already agreed to fund? To borrow Martin Wolf’s wonderfully evocative phrase, we are a python that has swallowed a hippopotamus.

At the end of the day, flushing more debt through the system is the only lever policy-makers know how to pull. Lower interest rates, quantitative easing, deficit spending, it’s all the same. It’s all borrowing against future income. Each time we bump up against recession, we borrow a bit more to keep the economy going. With garden variety recessions, this can work. Everyone wants the good times to continue, so no one demands debts be paid back. Creditors accept more IOUs and economic “growth” continues apace. If it sounds like Bernie Madoff’s Ponzi scheme, that’s because it is.

Each time Bernie’s scam got a few too many investor withdrawals, he’d simply plug the hole by raising more investor cash. The guys at Fairfield Greenwich were making so much in fees, they were happy to funnel more his way. But at a certain point, Ponzis get too big. There simply aren’t enough new investors to pay off older ones. In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable.

Naturally, policy-makers sound just like Ponzi-schemers: Just give us a little more cash to get us through this rough patch and everything will be copacetic. Ben Bernkanke at the National Press Club alluded to the famous quote by St. Augustine: “Oh Lord, give me chastity, but do not give it yet.” President Obama convened his “fiscal responsibility” summit days after passing the stimulus bill and days before proposing huge increases in health care spending.

So the question becomes, can we keep our Ponzi going? Or has it grown too large? Have we reached the moment when, like the Depression, there’s just no escaping the great unwind?

There has been much protest from economists that whatever economic funk we find ourselves in presently, it’s not as severe as the Depression. One data point suggesting otherwise is Household Debt vs. GDP. A favorite example of mine, though, was the chart above featured in the Congressional Oversight Panel’s January report. (Click to enlarge)

The chart downplays our current crisis by comparing the number of failed banks during the Depression with the number today. But the number of bank failures misses the point. The banking system is far more concentrated today. What makes our current banking crisis totally unprecedented is the size of bank failures relative to the overall economy. A better way to compare the two crises is to look at deposits in failed banks relative to GDP. (click to enlarge)

As you can see, I’ve taken the liberty of adjusting FDIC’s figure for 2008. This chart includes the $2.0 trillion worth of deposits at BofA (BAC), Citi (C), and Wachovia (WB) as of September 30, 2008.***

Last year WaMu was the only ultra-large bank that officially “failed” according to FDIC. But in the absence of government intervention, it’s likely the entire U.S. banking system would have gone under. Certainly the “failed” list would now include Citi, BofA and Wachovia.

Adding these three banks to the list still understates the scale of the crisis. Can anyone seriously argue that Chase (JPM) and Wells (WFC) would have survived the year in the absence of taxpayer largess?

What about non-deposit taking financials? AIG (AIG), Fannie (FNM), Freddie (FRE), Goldman Sachs (GS), Morgan Stanley (MS), GE (GE) and—at some point soon—a few of the Federal Home Loan Banks. Then there’s the insurance industry. With leverage worse than the banking system’s and balance sheets chock-full ‘o toxic assets, it too owes its survival to publicly-subsidized lending and regulatory “forbearance.”

Also FDIC’s Deposit Insurance Fund. The $19 billion it has in reserve is but a drop in the bucket compared to the $5 trillion worth of deposits and bank debt it now “guarantees.” Naturally, the Fund needs replenishing.

Public and private pension systems are drastically underfunded. California is on the verge of bankruptcy. The unfunded liabilities for Medicare and Social Security are north of $50 trillion.

European economies face even more oppressive debt loads.

The great Ponzi scheme that is the Western World’s economy has grown so big there’s simply no “fixing” it. Flushing more debt through the system would be like giving Madoff a few billion to tide him over. Or like adding another floor to the Tower of Babel. To what end? The collapse is already here. The question is: How much do we want it to hurt?

Using the public’s purse to finance “confidence” in a system that is already kaput may delay the Day of Reckoning, sure, but at the cost of multiplying our losses. Perhaps fantastically.

Bottom line….We can bankrupt ourselves propping up a system that is collapsing anyway, or we can dig ourselves out of debt, if not with higher interest rates then certainly with fiscal austerity. That would be a hard sell to the American people, I know. But deep down, Summers and Geithner know it is the right thing to do. It is, after all, the prescription they wrote for emerging markets facing financial crises.

It’s long past time we took our own medicine. If we don’t take it voluntarily, the bond market will stuff it down our throat anyway.

———————————–

*As asset values increased, so did the value of collateral to support new lending. More lending inflated asset prices, increasing the value of collateral yet again, encouraging still more lending. Since house prices never fall, everyone imagined this cycle could continue ad infinitum. And even if they didn’t, no one was going to get in the way. Too much money was being made. I wonder: did any of the current critics of MTM’s pro-cyclicality complain on the way up?

**Imagine mortgage rates jump from 5% to 8% tomorrow, with no corresponding increase in buyers’ incomes. A representative consumer has $3,000 to spend on housing today and tomorrow. Increasing interest rates 300 bps drastically reduces the principal value of the loan he can support with that monthly payment. (Admittedly, this is a simplistic way of looking at house prices. But it serves to demonstrate asset price sensitivity to interest rates.)

• Monthly payment = $3,000, # of mortgage payments = 360 (30 years * 12 months = 360), future value of mortgage balance = $0, IntRate = 5% over 12 months or .42% per period, Present value of asset = $558k

Now increase the interest rate to 8% while holding other variables constant.

• payment = $3,000, # of payments = 360, Future Value = $0, IntRate = 8% over 12 months or .67% per period, Present Value = $409k
• 409/558 - 1 = -27%

***Caveat: to the extent government intervention allowed insolvent financials to survive the S&L crisis, they wouldn’t be included in this list.

Comments

[Mbuna:]

Amen brother amen! The pain cannot be escaped. You can pay it now or pay it later. Guess which one will hurt more. I feel we are headed for a train wreck but may Grace and wisdom intervene for a more benign scenario.
(I especially liked the graph of deposits in failed banks as a % of nominal GDP.)

Mar 23 04:23 AM

[PeteK:]

With headlines like : "Obama's toxic assets plan greeted with skepticism" by The Associated Press, will only add to the confusion of the general public.
This kind of headline is insane and bias.
The press said it's dead while it's still alive.
The press said it faied before it even starts.
This is harmful to society and this country and it should stop.

Mar 23 04:44 AM

[Dave Wrixon:]

Basically, the fundamental flaw is that you cannot end a credit crisis by offer the lender less. Ben's solution is to cut interest rates to zero, and put the lenders capital in jeopardy by further undermining the stability of the dollar. If this had been any other currency it would have ended up in the dumpster years ago, but even the dollar has a point where the elastic band just snap. I think we are actually finally there.

Once the unrealistic concept of the dollar as a safe haven again the excess of Washington and Wall Street is outed for the biggest load of snake oil in history, then the dollar will be evaluated on fundamentals. That is not going to be pretty. Fundamentally, as the author says it the debt that you cannot run away from. Sure you can debase the currency a bit, but that just isn't going to solve the problem. The kind of numbers that would make a real difference would soon make the US economy just about on par with Russia in terms of GDP, way behind the EU, China or even India.

It would seem that Roosevelt got the glory for prolonging the agony in the the 1930s. And now Ben and Obama will get the glory for greatly exacerbating, the mess created by Greenspan and Bush. Only this time the US public won't fall for it. They will be baying for blood. It won't just be the end of political careers this is going to be the end of a lot of financial institution, probably including the Fed itself.

Mar 23 05:47 AM

[Dave Wrixon:]

Basically, the fundamental flaw is that you cannot end a credit crisis by offer the lender less. Ben's solution is to cut interest rates to zero, and put the lenders capital in jeopardy by further undermining the stability of the dollar. If this had been any other currency it would have ended up in the dumpster years ago, but even the dollar has a point where the elastic band just snap. I think we are actually finally there.

Once the unrealistic concept of the dollar as a safe haven again the excess of Washington and Wall Street is outed for the biggest load of snake oil in history, then the dollar will be evaluated on fundamentals. That is not going to be pretty. Fundamentally, as the author says it the debt that you cannot run away from. Sure you can debase the currency a bit, but that just isn't going to solve the problem. The kind of numbers that would make a real difference would soon make the US economy just about on par with Russia in terms of GDP, way behind the EU, China or even India.

It would seem that Roosevelt got the glory for prolonging the agony in the the 1930s. And now Ben and Obama will get the glory for greatly exacerbating, the mess created by Greenspan and Bush. Only this time the US public won't fall for it. They will be baying for blood. It won't just be the end of political careers this is going to be the end of a lot of financial institution, probably including the Fed itself.

Mar 23 05:47 AM

[Moon Kil Woong:]

You are quite right. The World Bank always has a nice austerity package ready for governments that are in the situation we are in today. Everyone knows very well what the cure is, but like a baby, we don't want to eat bitter tasting medicine.

Mar 23 06:05 AM

[atlasman:]

Nice article. The best way to get yourself out of debt is to earn your way out of it while restraining spending. Unfortunately BO and Congress are doing exactly the opposite by increasing spending and debt beyond anything ever conceived while simultaneously doing everything conceivable to punish earnings and make life more difficult for the common businessman/woman. This cannot turn out well.

Mar 23 06:39 AM

[etbob:]

The economy will eventually recover. Growth will be slower than in the past, as debt needs to be paid down, by both gov't and individuals. This should lead to a sustained, gradual, recovery.

Mar 23 06:47 AM

[ArtfulDodger:]

Mr. Rolfe Winkler:

You are dead right: the problem we're facing is too much debt. How can companies and nations function with this much debt hanging over them?

And what type of brain reasons that you cure a massive debt problem with more debt?

In respect to investing, I believe we're still in a time to buy cash and free cash flow and sell debt.

This I think investors should do regarding nations, too. Nations with high debt to GNP that have to print a lot of money should be sold. Or, at least investments in those nations should be held to low debt, high cash companies, and fund allocation in those nations held to a minimum.

Investors should look toward putting their funds to work in low debt to GNP nations that don’t have to print and borrow money to function.

Thank you very much for the article.

Mar 23 08:18 AM

[pacman1947:]

Excellent set of observations, Rolfe. Adding unsustainable debt to a debt-ridden economy exacerbates a capital crisis by assuming that we're fighting a cash flow crisis. It is a fundamental flaw in diagnosis. The prescribed cure is the same mistake made by Geithner earlier at the IMF. See: www.smh.com.au/opinion... Geithner's policies will destroy the US economy and leave us in ashes.

You have also correctly identified the seed of our destruction. The cash in the banks that was supposed to be protected by the FDIC is now naked. When the run on the banks occurs, in the very near future, depositors will find that nothing remains.

Mar 23 08:26 AM

[coolhead777:]

This is a great article, majority of the public is in denial of this fact. We can cut a diamond with a diamond, but we can not fight fire with fire, only with water, but what we are trying in this case is that we are trying to fight fire with gasoline.

The policy makers in Washington are giving what the public likes not what public needs, the bitter medicine. I bet they are spending their time watching the CNBC and Bloomberg news channels and devising their plans instead of thinking correctly.

Mar 23 10:36 AM

[notsosmart:]

sadly , i was right.i said ponzi vegas & wall st were all mixed together.fortunately,i never touched the financials & got out @ 14,000dj. not because i was smart but scared.even now the options"resets" are stealing from the stockholders & sec seems to ignore this.so ponzi & vegas are doing well.made-off was a piker compared to what wall st did to the world.

Mar 23 10:43 AM

[raytayzmd:]

..."allow asset prices to fall to whatever level they need to in order for markets to clear"...ultimately that is what will happen regardless of what the fed or IMF or anyone else does...that is what has happened in past "boom-bust" cycles despite actions taken to preserve the economy...what the government is doing currently is trying to stabilize the situation -- i.e. alleviate fear among the populace so that alone could shut the economy...towards that end, their efforts are laudable...no doubt there will be complications -- as have occurred in past cycles -- and these will have to be dealt with...but the point is that NO ONE has come up with a method for preventing the cycle and NO ONE has come up with a solution to treat the consequences when the "bust" finally becomes reality...the best our political and business leaders can do is act to reassure everyone that this is NOT "armageddon" and there is a tomorrow and that we will survive to see it...articles such as yours do little more than inflame readers needlessly.

Mar 23 11:11 AM

[Lawrence York:]

I think the author is dead on in his assessment that more debt is not the cure of America's financial woes. I would additionally add that US unrealized debt will amplify as the US is forced to repatriate the fruadulent securities it packaged and sold around the world; as GNMA's losses are realized, and as a wave of credit card and auto securitizations go bust. Indeed the solution is also a problem. The big bang will come when the US government completes its transfer of bad debt to the Treasury and the world, en masse, concludes that private securities are the place to be as government guaranteed securities are a complete illusion. The answer then, is a for sale sign--selling US private sector assets to foreigners in any amount they desire.

Mar 23 11:30 AM

[Dirk McCoy:]

Think of the economy as a large human pyramid- labor specialization, outsourcing, competitive advantage and free trade, economies of scale have created an economy with linkages everywhere. And think of that pyramid getting bigger, covering more of the world, lifting billions out of poverty, lifting millions into astronomical wealth, while maintaining living standards for most of the participants.

Your calculation of npv was spot on. So, apply it back in 2005 when the Fed raised short term interest rates artificially above long term rates, and you can see what happened to cashflow for not only homeowners, but for businesses that use revolving loans. So the pyramid started to collapse.

So, do we let is collapse? Or do we bolster it? In a world with 3 billion people living on $2.50 a day and billions underemployed, with technology on the shelf (solar, genetics, desalinization, 4G, smart grid), and with excess commercial real estate floorspace and labor, there is plenty of room for additional growth. And as long as dollar-denominated goods and services can grow, inflation and a significant fall in the dollar are unlikely.

It is possible that we could establish a less risky and leveraged Amish or Muslim-like economy with protectionism, overregulation, and constrained monetary and debt policies- but we won't call them to deal with the killer asteroid, killer virus, major natural disasters, or global poverty, will we?

Mar 23 11:30 AM

[kelm:]

The argument that has been made is that inflation is better than depression yet I can name multiple nations that have been flattened by massive inflation but am at a loss to name one that lost its standing because of a depression. Japan, it could be argued, has had a lost two decades of growth and they are losing their standing but I have to think the massive debt we are accumulating is a structural impediment that will send us down the path of a greatly diminished dollar, high interest rates and massive inflation. That will surely destroy the US position in the world leaving China, a nation unencumbered by debt, in the ascendant.

Mar 23 11:37 AM

[dw57:]

not sure that if we continue the former plan of pumping up the GDP using credit will work. Since wage destruction has been in full force for decades, and has in fact increased how will the economy do any thing but drift lower. after all, there is one rule that can't be over ridden in economics. business need willing customers will can buy and PAY for their products. business has been so enamored of pushing the wages of their customers down, that at some point there was going to a whirlwind for them to reap. that being the lack of customers at all. and that will keep inflation in check since it can only keep going if customer's can keep up. maybe this is that great equalization of the world economies with the US collapsing down to match others?

Mar 23 11:57 AM

[Vuke:]

The dollar remains its status as the world's reserve currency with no benefit to anyone seeing that destroyed. Consequently, the world will go along with the current de-Ponzification process as few want to see a trade collapse or possible war.

It will take time with final results difficult to predict but a likely outcome is higher prices for commodities with rising incomes for developing nations and some inflation for the developed world.

The future standard of living for developed nations will depend on how effectively we get back to the real basis of business. That is, creating something with a real value added component rather than paper towers of abstracts. The financial, legal and social structures we have in place (which are the real under-pinning of business) surpass those of most developing nations so we should face this transition with confidence.

Perhaps we should think of this period as a final opportunity for the seven billion people of the world to share its diminishing resource base in a fair and equitable way. And to do so without destroying the planet in the process.

Mar 23 12:28 PM

[Socialism c...:]

We should all just tow the party line, eh komrade??


On Mar 23 04:44 AM PeteK wrote:

> With headlines like : "Obama's toxic assets plan greeted with skepticism"
> by The Associated Press, will only add to the confusion of the general
> public.
> This kind of headline is insane and bias.
> The press said it's dead while it's still alive.
> The press said it faied before it even starts.
> This is harmful to society and this country and it should stop.

Mar 23 12:47 PM

[raising4dau...:]

Eventually? If the gub'mint ran a $100B surplus every year (over and above interest payments) for 100 years, it could pay down a national debt of $10T. Surplus of $100B? Not likely any time soon. 100 years? Our unborn great-grandchildren will still be paying.


On Mar 23 06:47 AM etbob wrote:

> The economy will eventually recover. Growth will be slower than in
> the past, as debt needs to be paid down, by both gov't and individuals.
> This should lead to a sustained, gradual, recovery.

Mar 23 12:47 PM

[Socialism c...:]

Are you serious about these assertions? There are PLENTY of countries that would LOVE to see the dollar destroyed or have no problem with trade wars or military wars.


On Mar 23 12:28 PM Vuke wrote:

> The dollar remains its status as the world's reserve currency with
> no benefit to anyone seeing that destroyed. Consequently, the world
> will go along with the current de-Ponzification process as few want
> to see a trade collapse or possible war.

Mar 23 12:49 PM

[Socialism c...:]

You seem to be asserting that becoming austere and reducing debt (instead of stimulating via massive debt increases) will lead us to an undeveloped, 3rd-world standard of living, with no remaining scientific or technical ability. How specious!


On Mar 23 11:30 AM Dirk McCoy wrote:

> Think of the economy as a large human pyramid- labor specialization,
> outsourcing, competitive advantage and free trade, economies of scale
> have created an economy with linkages everywhere. And think of that
> pyramid getting bigger, covering more of the world, lifting billions
> out of poverty, lifting millions into astronomical wealth, while
> maintaining living standards for most of the participants.
>
> Your calculation of npv was spot on. So, apply it back in 2005 when
> the Fed raised short term interest rates artificially above long
> term rates, and you can see what happened to cashflow for not only
> homeowners, but for businesses that use revolving loans. So the
> pyramid started to collapse.
>
> So, do we let is collapse? Or do we bolster it? In a world with
> 3 billion people living on $2.50 a day and billions underemployed,
> with technology on the shelf (solar, genetics, desalinization, 4G,
> smart grid), and with excess commercial real estate floorspace and
> labor, there is plenty of room for additional growth. And as long
> as dollar-denominated goods and services can grow, inflation and
> a significant fall in the dollar are unlikely.
>
> It is possible that we could establish a less risky and leveraged
> Amish or Muslim-like economy with protectionism, overregulation,
> and constrained monetary and debt policies- but we won't call them
> to deal with the killer asteroid, killer virus, major natural disasters,
> or global poverty, will we?

Mar 23 12:52 PM

[LJR:]

Interesting time though, isn't it?

I sit here, outside the merry-go-round, and watch with amazement and a bit of amusement. Grown children riding the painted horses, some grabbing for a tarnished brass ring while going in circles (cycles?).

Mar 23 12:57 PM

[Gregman2:]

"The idea of a generalised debt cancellation is not wholly unknown in modern times. The late Gerald Feldman, the world’s leading authority on the German hyperinflation of 1923, drew a parallel between the ancient Hebrew yovel and the wiping out of all paper mark-denominated debts as a result of the collapse of the German currency (though, as he was quick to point out, those whose savings were wiped out were far from jubilant).'

--Niall Ferguson
www.niallferguson.com/...

Mar 23 01:42 PM

[Chris B:]

"the only “solution” to this crisis is price discovery, to allow asset prices to fall to whatever level they need to in order for markets to clear. This is bad news for over-levered balance sheets, but there’s nothing else to be done."
----------------------...
You're channeling Andrew Mellon now: "Liquidate, liquidate, liquidate..." The consequences of such policies have been established by history.

The problem with a liquidationist attitude is not just that companies with over-levered balance sheets will go under. It is that healthy, responsible companies will go under or be forced to shrink too. That means layoffs even for the people who did everything right, which only further shrinks demand for the remaining companies. Andrew Mellon's and Herbert Hoover's policies led to a downward spiral of unemployment and poverty that affected everyone.



"The great Ponzi scheme that is the Western World’s economy has grown so big there’s simply no “fixing” it."
----------------------...
A rising consumer savings rate, back to the historical norm of around 10%, will certainly whack GDP (an increase from 0-10% would in itself knock roughly 7% off GDP). However, was life really that bad in the 80's and early 90's when consumer savings were double what they are today? The third-world-country predictions are a bit emotional I think. Just 1-2 years of high savings would do wonders for reducing consumer debt, and capitalism can self-correct, as it has during every recession. Maybe in the future blue-collar laborers won't commute from McMansions 50 miles to work in $40k Tahoes. Oh well.

Regarding government debt, I would agree that the public needs to quit supporting the whole "kick the can down the road" attitude. I wonder how popular the $3 Trillion Iraq/Afghanistan projects would have been if we were actually paying for it in extra taxes instead of invisible debt? I suspect there would be riots! Yet, the time to balance budgets is in the good times. I would support a balanced budget amendment, with borrowing allowed only in times of emergency - as declared by a board of non-politicians such as the Supreme Court. Right now, however, we are in just such an emergency and we risk a depression if we repeat the mistakes and inaction of the 1930's.



"It’s long past time we took our own medicine. If we don’t take it voluntarily, the bond market will stuff it down our throat anyway."
----------------------...
The market for US treasuries has demonstrated very little weakness, despite below-zero real interest rates. Your statement makes for a neat slogan, but does it agree with the facts?

Mar 23 01:59 PM

[Dave Wrixon:]

Yes, but it may seem to many that the collapse of the pyramid will rid those billions at the bottom of the burden of those above.

Of course when everything reforms there will still be people at the top of pyramids. Perhaps there will be several pyramids with the Masters of the Universe from Wall Street on one that looks a bit like a molehill.


On Mar 23 11:30 AM Dirk McCoy wrote:

> Think of the economy as a large human pyramid- labor specialization,
> outsourcing, competitive advantage and free trade, economies of scale
> have created an economy with linkages everywhere. And think of that
> pyramid getting bigger, covering more of the world, lifting billions
> out of poverty, lifting millions into astronomical wealth, while
> maintaining living standards for most of the participants.
>
> Your calculation of npv was spot on. So, apply it back in 2005 when
> the Fed raised short term interest rates artificially above long
> term rates, and you can see what happened to cashflow for not only
> homeowners, but for businesses that use revolving loans. So the pyramid
> started to collapse.
>
> So, do we let is collapse? Or do we bolster it? In a world with 3
> billion people living on $2.50 a day and billions underemployed,
> with technology on the shelf (solar, genetics, desalinization, 4G,
> smart grid), and with excess commercial real estate floorspace and
> labor, there is plenty of room for additional growth. And as long
> as dollar-denominated goods and services can grow, inflation and
> a significant fall in the dollar are unlikely.
>
> It is possible that we could establish a less risky and leveraged
> Amish or Muslim-like economy with protectionism, overregulation,
> and constrained monetary and debt policies- but we won't call them
> to deal with the killer asteroid, killer virus, major natural disasters,
> or global poverty, will we?

Mar 23 02:30 PM

[carey_jim:]

These are great questions.

We don't really know the answers.

Our moral histories (the Bible) teach us that sin of all kinds is punished by God (or natural laws if you prefer.) Most of us teach this to our children.

But from the time of Plato's Thrasymachus (at least), www.iep.utm.edu/t/thra... who said that 'justice is the interest of the stronger', political scientists and moralists have debated the topic.

Hobbes, Machiavelli, Lenin, Henry Kissinger and others have sided with Thrasymachus www.city-journal.org/2... and denied the relevance of abstract ethical principles of justice to politics. (Although most of them advocate hypocrisy and would vehemently deny this!)

Does nature (God) punish moral imbalance and is politics an extension of morality into practical life?

Or is politics merely the activity of the strong securing their own advantage under the aegis of political slogans?

Giving this post a minus or plus one will not, alas, add anything to the debate, of course, but it's human nature so why not give into temptation? ;)

Mar 23 03:03 PM

[billp37:]

Bernie Madoff case may help us recover $22,036 stolen from our Sandia Laboratory Federal Credit Union retirement-protected saving accounts by SLFCU CEO Christopher Jillson.

MarketWatch

Madoff's victims can deduct losses in '08
IRS grants break on investment and 'phantom' income, but carry-back varies

www.marketwatch.com/ne...

pointed us to IRS form 4684

www.prosefights.org/nm...

which is EXACTLY what we need to FIRST try to convince National Credit Union Administration [NCUA] to give us fraud loss restoration of our savings.

Almost unbelieveable is that Ayatollah Sayyid Ali Khamenie and Dr Mamoud Ahmadi Nejad are involved in the reason our $22,036 was stolen.

www.prosefights.org/nm...

We filed an official genocide criminal complaint affidavit against Brzezinski in New Mexico federal 97 CV 266 for

"Nojeh Coup

In July 1980, Zbigniew Brzezinski of the United States met Jordan's King Hussein in Amman to discuss detailed plans for Saddam Hussein to sponsor a coup in Iran against Khomeini. King Hussein was Saddam's closest confidant in the Arab world, and served as an intermediary during the planning. The Iraqi invasion of Iran would be launched under the pretext of a call for aid from Iranian loyalist officers plotting their own uprising on July 9, 1980 (codenamed Nojeh, after Shahrokhi/Nojeh air base in Hamedan). The Iranian officers were organized by Shapour Bakhtiar, who had fled to France when Khomeini seized power, but was operating from Baghdad and Sulimaniyah at the time of Brzezinski's meeting with Hussein. ..."

Let's see what happens?

Mar 23 04:33 PM

[Long US stockS:]

I was watching CNBC this morning - same bunch of Pumpers,if-fies & lousy predictors become "expert cum critics" of Govt plans- poor"short sellers" !!!

Mar 23 04:40 PM

[mplaut:]

All of this is superbly rational, but one should remember the famous observation by Lord Keynes: The market can stay irrational longer than you can stay solvent.

Mar 23 07:09 PM

[Dirk McCoy:]

There are some great comments here.

At the end of the day, I think the great question to be answered is this- are we running out of key raw materials and/or poisoning our planet at such a rate that we need to constrain growth? If so, then rationing is a reasonable plan, even if it goes against our traditional American notion of individual liberty. One of Gordon Brown's advisors is suggesting the UK cut their population in half.

On the other hand- what if we have enough solar energy to obviate energy concerns, what if global warming is overstated (if not a complete hoax), what if GM food, increasing atmospheric CO2, and big water infrastructure can further drastically increase food production, what if recycling, improved manufacturing technology, and composites replace the need for most metals- and the correlation of reduced childbirth with rising living standards and some conservation means that we needn't run out of anything? How many millions- or billions- do we consign to continued poverty by not pursuing massive global growth? And what would be the US role in that growth?

It seems too great a question to leave to politicians and book-selling economists.

Mar 23 09:46 PM

[dcb:]

I believe the current policies we be pursued until the bankers, hedge funds, and private equity have no more money to be gained from government give programs.

The only way to stop the current mess is to ensure congress knows that it won't get re elected if they continue. That is unlikely to happen for a while yet, because the American public get their news from a local paper, the 6:00 news, or is so scared of the word socialism they react without knowledge.

Large amount of money is going to flow from certain sectors of the economy to ensure voting patterns of our legislature. This will make profits in that sector a given. Since the rewards of wall street are not directed to long term performance these players have all the incentive in the world to ensure ultimately failing policies continue as long as they can.

Continued boom and bust cycles maximize profits and socialize losses. Of course they will do everything they can to keep the system exactly as it is.

Mar 23 09:52 PM

[EEB:]

I would like to thank Chris B for what was, in my opinion, the best response to this article. The article's call for fiscal austerity was very Hoover-like, and just as misguided. I also liked Chris B's obersvation that the Iraq and Afghanistan wars have been expensive and still are expensive. Just think how much better off we would be right now if the Bush tax cuts had not been enacted and we had not invaded Iraq. It's funny how deficit spending is such a nightmare now, but it was such a great idea for the last eight years. In the future, I hope that Americans remember that you are supposed to save when times are fat so that you can have something when times are lean. Currently, we seem to be getting that truism backwards.


On Mar 23 01:59 PM Chris B wrote:

> "the only “solution” to this crisis is price discovery, to allow
> asset prices to fall to whatever level they need to in order for
> markets to clear. This is bad news for over-levered balance sheets,
> but there’s nothing else to be done."
> ----------------------...
> You're channeling Andrew Mellon now: "Liquidate, liquidate, liquidate..."
> The consequences of such policies have been established by history.
>
>
> The problem with a liquidationist attitude is not just that companies
> with over-levered balance sheets will go under. It is that healthy,
> responsible companies will go under or be forced to shrink too. That
> means layoffs even for the people who did everything right, which
> only further shrinks demand for the remaining companies. Andrew Mellon's
> and Herbert Hoover's policies led to a downward spiral of unemployment
> and poverty that affected everyone.
>
>
>
> "The great Ponzi scheme that is the Western World’s economy has grown
> so big there’s simply no “fixing” it."
> ----------------------...
> A rising consumer savings rate, back to the historical norm of around
> 10%, will certainly whack GDP (an increase from 0-10% would in itself
> knock roughly 7% off GDP). However, was life really that bad in the
> 80's and early 90's when consumer savings were double what they are
> today? The third-world-country predictions are a bit emotional I
> think. Just 1-2 years of high savings would do wonders for reducing
> consumer debt, and capitalism can self-correct, as it has during
> every recession. Maybe in the future blue-collar laborers won't commute
> from McMansions 50 miles to work in $40k Tahoes. Oh well.
>
> Regarding government debt, I would agree that the public needs to
> quit supporting the whole "kick the can down the road" attitude.
> I wonder how popular the $3 Trillion Iraq/Afghanistan projects would
> have been if we were actually paying for it in extra taxes instead
> of invisible debt? I suspect there would be riots! Yet, the time
> to balance budgets is in the good times. I would support a balanced
> budget amendment, with borrowing allowed only in times of emergency
> - as declared by a board of non-politicians such as the Supreme Court.
> Right now, however, we are in just such an emergency and we risk
> a depression if we repeat the mistakes and inaction of the 1930's.
>
>
>
>
> "It’s long past time we took our own medicine. If we don’t take it
> voluntarily, the bond market will stuff it down our throat anyway."
>
> ----------------------...
> The market for US treasuries has demonstrated very little weakness,
> despite below-zero real interest rates. Your statement makes for
> a neat slogan, but does it agree with the facts?
>

Mar 23 09:56 PM

[dcb:]

As a jew do you know of anybody who could get me into the money club? I have been very unsuccessful in both my attempts of world domination and the acquiring of supreme wealth. Heck, I didn't even get the call to stay away from the world trade center for 9/11. Please do tell what I am doing wrong.


On Mar 23 12:49 PM MADEINWGERMANY wrote:

> the ponzi scheme was always in america from the start of killing
> natives and stealing their resources, first it was Europeans who
> had all the wealth but then jews who were running from pogroms in
> Europe, Russia started to use their cheating instincts on the new
> land, today jews have very big influence in american economy, from
> the fed to cia all are jews, they are cruel, they enrich themselves
> on the back of hard working americans, americans must rise and stop
> this inequality, where 1% of america controls 99%.
> In Europe this problem was solved during WWII, now it's your turn.

Mar 23 09:58 PM

[dcb:]

There may be very good reasons why we haven't figured out a way to tame the booms. Maybe it is because nobody wants to stop the party. You don't get elected that way, you don't get your bonus that way. If there ever was an example of this it is the current crisis. Despite much warning toxic assets were sold to everyone and anyone. Those who did the selling don't end up paying. the tax payer takes the loss, and washington was happy that people were living pretty and driving big new SUV's. So why should someone figure out a way to tame the boom when there is no incentive to do so.


On Mar 23 11:11 AM raytayzmd wrote:

> ..."allow asset prices to fall to whatever level they need to in
> order for markets to clear"...ultimately that is what will happen
> regardless of what the fed or IMF or anyone else does...that is what
> has happened in past "boom-bust" cycles despite actions taken to
> preserve the economy...what the government is doing currently is
> trying to stabilize the situation -- i.e. alleviate fear among the
> populace so that alone could shut the economy...towards that end,
> their efforts are laudable...no doubt there will be complications
> -- as have occurred in past cycles -- and these will have to be dealt
> with...but the point is that NO ONE has come up with a method for
> preventing the cycle and NO ONE has come up with a solution to treat
> the consequences when the "bust" finally becomes reality...the best
> our political and business leaders can do is act to reassure everyone
> that this is NOT "armageddon" and there is a tomorrow and that we
> will survive to see it...articles such as yours do little more than
> inflame readers needlessly.

Mar 23 10:07 PM

[dcb:]

Last bubble lasted 2002 to 2007? so I figure we could have irrational markets for 6 years until this happens again.

Mar 23 10:10 PM

[dcb:]

www.bloomberg.com/apps...

This is a link from Bloomberg. A BOA analyst says why it won't work, and he gets paid to say it will.

Mar 23 10:15 PM

[Rajitos:]

On a positive note, one key element of the NPV calc is the income piece. If Ben succeeds in creating an inflationary condition 2 years from now, incomes will rise to service the debt at higher interest rates. Obviously, the hope is growth would resume in the economy due to the debased dollar.

Mar 23 10:29 PM

[Al-USA:]

Good article, I was going to say more, but enough has already been said above.

Mar 24 02:03 AM

[ZagnZig:]

He writes: “Consequently, solutions to date have not only failed to “fix” anything, they have made the problem worse.” How obviously wrong can anyone be? People, please do not forget the consequences and the scale of the crisis.

Imagine the “solution” this author proposes: C, BAC, WFC, MS, AIG, FNM, FRE, JPM…all failing? What sort of solution would that be? Any suggestion that letting them fail would be better than our current predicament is nonsense! What grocery store would remain; would you still have your job? How would you feed your family or keep them warm?

Violent civil unrest would ensue. The nation would be blown to pieces.

Reading the comments here makes me wonder if the people who think bank failures are the cure are not honestly considering the final consequences of their decisions.

Mar 24 05:50 AM

[nukldrager:]

Is this really a ponzi scheme?

"The term "Ponzi scheme" is a widely known description of any scam that pays early investors returns from the investments of later investors." ... wikipedia

Mar 24 09:00 AM

[Chris B:]

That's why the internet can be a crappy source of information. People can spout off whatever cheap lowbrow populist slogans they want... often anonymously or with a pseudonym, so as not to embarass oneself - which makes the internet the absolute bottom on the accountability scale. 90% of the brainiacs who are advocating a repeat of the great depression because that it morally right or something put twice as much thought into what color shirt to wear each day.


On Mar 24 05:50 AM zagnzig wrote:

> He writes: “Consequently, solutions to date have not only failed
> to “fix” anything, they have made the problem worse.” How obviously
> wrong can anyone be? People, please do not forget the consequences
> and the scale of the crisis.
>
> Imagine the “solution” this author proposes: C, BAC, WFC, MS, AIG,
> FNM, FRE, JPM…all failing? What sort of solution would that be? Any
> suggestion that letting them fail would be better than our current
> predicament is nonsense! What grocery store would remain; would you
> still have your job? How would you feed your family or keep them
> warm?
>
> Violent civil unrest would ensue. The nation would be blown to pieces.
>
>
> Reading the comments here makes me wonder if the people who think
> bank failures are the cure are not honestly considering the final
> consequences of their decisions.

Mar 24 09:11 AM

[Walter Finch:]

Good article. It's not at all inflammatory. The point that's been made by a number of other commentors is that what we want to hear and what we need to hear are two very different things right now. Blowing smoke up the rear end of the American people with pretty speeches and monopoly money isn't going to do anything other than create a massive lack of trust that could potential do incredible harm to the financial and political systems for a very long time. As the old saying goes ...the truth hurts.


On Mar 23 11:11 AM raytayzmd wrote:

> ..."allow asset prices to fall to whatever level they need to in
> order for markets to clear"...ultimately that is what will happen
> regardless of what the fed or IMF or anyone else does...that is what
> has happened in past "boom-bust" cycles despite actions taken to
> preserve the economy...what the government is doing currently is
> trying to stabilize the situation -- i.e. alleviate fear among the
> populace so that alone could shut the economy...towards that end,
> their efforts are laudable...no doubt there will be complications
> -- as have occurred in past cycles -- and these will have to be dealt
> with...but the point is that NO ONE has come up with a method for
> preventing the cycle and NO ONE has come up with a solution to treat
> the consequences when the "bust" finally becomes reality...the best
> our political and business leaders can do is act to reassure everyone
> that this is NOT "armageddon" and there is a tomorrow and that we
> will survive to see it...articles such as yours do little more than
> inflame readers needlessly.

Mar 24 12:31 PM

[dcb:]

www.bloomberg.com/apps...

This is a link about mortgage refinancing charges. This is where your tax payer money is going. How much evidence do you need to realize the banks care about their profits, they don't care very much if there is a recovery. They tax my money then make it harder for me to refinance. Why am I paying for this. they are not on our side. they are on their side.

Mar 24 04:20 PM

[VP of Commo...:]

According to the OCED numbers our debt load is about 9th of 30 relative to GDP, and before someone says "but look at the total amount", income is generally considered relevant to how much one is allowed to borrow. Regardless, it appears that 50% more government debt will not lead immediately to anarchy.

Otherwise, yes we have overspent. Yes, we will need to pay it back. But no, I don't believe there is any reason to take advantage of the credit bubble bursting to intentionally collapse the economy for some so-called moral reason. If that's what you believe, why are you on the internet? You should be hard at work on that bunker in the backyard with the spam, water and ammo. You also should have no debt and no investments other than gold. If that is not the case then you unfortunately NEED our wretched immoral economy to stagger onward until you're free and clear.

Our government services are about what one should expect given the relatively low tax rates that we have. In order for health care, infrastructure, education, debt reduction etc. We are going to need to cut spending as soon as possible (war, space program, no-bid government contractors, etc.) and increase taxes. I have more friends than I can count from europe, asia, and canada, tax rates are very much related to services. If you have traveled the world, made friends with the natives, talked to them about their services and tax rates, and still believe otherwise, please share. If you're a GWBush-esque american with no passport who simply doesn't like paying taxes, put a sock in it.

Our gas tax is a joke, as are our cigarette/alcohol taxes in most of the USA. Want better roads and lower medicare/medicaid costs? DUH! Health care related tort reform wouldn't hurt either. Some say a higher gas tax would unfairly target the poor, whereas I think the poor should be driving eight year old civics and corrollas.

The article claims: "In the aggregate, the same is true for Western economies. Their debt loads are now so huge, they are simply unpayable." The author did a much better job explaining Madoff's scheme than giving any explanation of exactly how the western world's debt load is unpayable. And then 25 people post something to the effect of "hear hear, you da man!". Every day on this site an article (or articles) is posted with massive leaps of faith in between the facts and the conclusions. THINK! Find those holes, make people explain them. The alternatives to not thinking are pretty simple: pollyanna optimism or bunker/ammo/spam pessimism.

Mar 24 06:11 PM

[User 382417:]

of course it is a ponzi scheme....and they are pushing us to again, be good little consumers and load up on debt again..

by the way, check your figures again, wells fargo was the only bank that had a minimal exposure to subprime, until they digested wachovia..they did not need the bailout, but was told to take it, so the others wouldn't look bad, an "unfair advantage"..

they are all liars, if they work for the govt, and their lips are moving....it is lies, desperate lies now..

Mar 24 08:53 PM

[Dan in mpls:]

Cris B got it right - I hope. I have told everyone that things will be horrible in the comming years. We as a antion will be reduced to living under the conditions of the (shudder) 1960's! We will still be the wealthiest nation in the world. My grea fear though is that the curent fix of huge spending that an over the top popular president may well be able to pull off by strength of his honestly shining personality will sink us utterly and completely. I am a rabid fiscal republican and cant help but wonder how many of the bright contributors here are liberals. I cant see how a democrat can fathom the fix that we need, i.e. vastly reduces federal and state spending. Unlike most here I am invested in realestate as I have always felt the stock market was rigged. What I fear is that even though most of my property is paid for, the government propery taxes and the hidden tax in my utility bills (by not going nuclear when its the only real option to lower them) will sink even me as I collect whatever rents I can get out of my tenents. I am already doing this as I sometimes adjust my rents based on a residents abilty to pay. I guess Im getting far afield of the gang here but Im taking this often spoken of depression we all fear and trying to take it home to my life. I do feel we have a few years of recovery ahead of us before it all tanks again of its own weight. Kids these days, (anyone under 40), will not want to live in any kind of "normal" economic world and have no clue how to do it. That will keep us going for a bit - God bless em :-)

Mar 24 09:35 PM

[BigBoss:]

So your solution is to do nothing and pay down debt?

We were in a deficit situation before the "crisis". If we cut spending, that means less benefits for government patrons or fewer government funded jobs. That means those consumers lessen consumer spending generating less corporate and personal income revenue to fund even our existing deficit. You plan will just aggravate the problem.

They are operating the government like a business. Right now, we are making capital expenditures in hopes of high returns in the future. That's why the energy policy, health care reform, and construction projects are so key. They are the seed investments into what we hope are the key businesses of the future that will generate high revenue. They're hoping they can be the internet of the 2010's. The other stuff is to either fix the system or help those who are in dire straights right now.

As much as people want to coin it as socialism, it's capitalism by the only remaining member of society who can fund it, the Federal Government.

Your plan would've worked in the year 2000 when we had a balanced budget, but that was squandered. I certainly would've agreed with you then.

Mar 24 10:26 PM

[Stephen Str...:]

The irony of the whole credit crisis is that the countries suffering most are not the importers but the exporters - China, Japan and Germany. It's true I may suffer notionally by delaying purchasing my new Prius for a year or two, but my current car is practically as good as new at four years old. It's the guys at Toyota who make them who will suffer the most from a collapse in sales.

These countries manufacture more than they consume, with their economies geared for full production for Western markets.

If the only solution is for the West to repay debt, then these exporting countries will have to balance their trade by buying US goods to give the US the money to pay them back. The alternative is that the Fed will just print the money - which is effectively what happened when the USD fell from 300JPY to 100JPY over a decade ago.

All credit (!) to the Americans for borrowing in their own currency.

Mar 27 03:14 PM