The real problem with the economy

February 8, 2009 | By | 1 Reply More

I’m not an economist, yet I know that the most vocal economists these days are not shooting straight with us.  You can see it in their faces and you can hear it in their voices.

Niall Ferguson is a professor of history and a professor at the business school at Harvard.   His analysis of our economic problems rings true to me.   He starts with the premise that we are in hock up to our eyeballs and we are in massive denial that this is the real problem:

The harsh reality that is being repressed is this: the Western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Average household sector debt has reached 141 per cent of disposable income in the United States and 177 per cent in the United Kingdom. Worst of all are the banks. Some of the best-known names in American and European finance have balance sheets forty, sixty or even a hundred times the size of their capital. Average U.S. investment bank leverage was above 25 to 1 at the end of 2008. Eurozone bank leverage was more than 30 to 1. British bank balance sheets are equal to a staggering 440 per cent of gross domestic product

The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments currently propose to do.

Ferguson is proposing two steps in order that we can even begin to address our economic nightmare.

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

Based on numbers like those cited above, I have no more patience hearing that the “solution” to our problem is to gather up a whopping dose of pork and to finance it with deficit spending.   That “solution” appears to be only a desperate attempt to buy a few more months of denial before we need to make real changes to how we live our lives.   May we all survive the coming adjustment.

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Category: Economy, ignorance, Politics, snake oil

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

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  1. Niklaus Pfirsig says:

    Part of the problem was that the books were cooked by exploiting the mile wide loopholes created as an after effect of deregulation of the financial sector of the economy.

    Large corporations were encourgaged, and even required, as a precondition of staying in business, to engage in an institutionalised form of fraud that had all the implications of counterfeiting, but was perfectly legal during the Bush administration.

    The problem was the trading of future value of high risk, high interest subprime debt as if it were capital. The conservative pundits are quick to accuse the poor people that took advantage of Comunity Reinvestment loans, but if the records are ever made available, I think it will show that the defaulted loans were primarily ARMs on second homes. something the poor can't afford.

    Through the creative bookkeeping, the economy appeared to be booming, when in reality a small group of people were getting extremely wealthy at the expense of the masses. Financial businesses appeared to be making record profits, return on investments appeared to soar, but it wasn't real money. It was "promised" money. No one should spend an IOU until they have the cash in hand.

    In the end, the cycle of borrowing money to loan to others became unsustainable and it collapsed, leaving us where we are today. in a mess.

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