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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

March 24, 2009 at 10:35 AM

We owe, we owe: Will thawed credit markets help the world’s biggest debtor nation?

Top of the News: I spoke at a Leadership Tomorrow event this morning in downtown Seattle where a startling slide was shown. Part of it showed the gradual decline in personal savings of Americans until the bar went below zero. The other displayed the staggering rise in personal debt per capita, more than doubling since the early 1990s. This is just the tip of the debt iceberg: American corporations, especially financial firms and the shadow banking system that includes hedge funds, are leveraged to historic levels. The federal government, which must spend money to address the recession, went into the crisis deeply in debt, especially to foreign creditors. The total debt burden of the U.S. is estimated to be three and a half times larger than gross domestic product.

And yet, both the Bush and Obama administrations, along with the Federal Reserve, have been searching for the key to “unlock” the credit markets, “so banks can start lending again.” Yet more borrowing may be the last thing many individuals and companies should be doing. Too much debt is one of the drivers of this historic recession. On the other hand, perfectly solvent, low-leverage companies have found themselves unable to get credit — this is hitting not just larger firms but companies on Main Street. This is the fundamental contradiction and balancing act facing our financial system.

In an ideal world, America would lower its debt as it returned to producing more real things of value that could be sold in the world economy (as opposed to, say, financial swindles). Americans would increase their savings. Unfortunately, the severity of the downturn is administering the rough justice of the market and much of this rebalancing is happening with damaging speed. Among the casualties: the majority of the economy that depends on consumer spending. And the unsustainable debt overhang remains.
No wonder Chinese central bankers are floating the idea of an alternative to the dollar as the world’s reserve currency. For American living standards, that would be an instant express elevator going down. Economic historian Niall Ferguson argues that the situation is so dire that America should bite the bullet and cancel its debt. With all due respect, I think that’s nuts.
As Treasury Secretary Tim Geithner and Fed chief Ben Bernanke testify before Congress today, they realize these are much bigger stakes than the shameful AIG bonuses — and the window to fix things is closing fast. Wall Street’s rally yesterday was all about instant gratification — a great deal for banks and the private investors, with taxpayers picking up most of the risk. And it was about President Obama’s clear signals that he doesn’t want to fundamentally change the way Wall Street and the big banks have done business. Surely they’re not trying to find a way to create one last bubble…
Today’s Econ Haiku:
Tim wants new powers
To close the barn door at last.
Any cows still here?

Comments | More in Banking, Macro/Big picture


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