Why the Crisis Isn't Over
And four ways to stop the bleeding.
Here's my succinct snapshot of where we stand (and why it's not over):
The US consumer is still drowning in debt. Job prospects are dire. Households can't pay existing debt, much less get credit.
It will get worse, because:
- Alt- A/option-ARM resets are just hitting.
- Commercial real estate defaults loom.
- Before consumer spending can pick up, several trillion in debt has to be re-negotiated or discounted. Until then, we'll have zombie consumers and zombie banks.
1. Debt relief - preferably by process, but debt repudiation through easing or inflation will reduce debts, if no one does anything else.
2. Restart credit as best we can. Borrowing is now at half pre-recession levels, but lending won't return to credit-bubble levels. The securitization process (the "shadow banking system") that accounted for close to half of bubble-era lending is dead, and very unlikely to get back to previous levels.
3. A much bigger stimulus - get people back to work so they qualify for credit.
4. Someone to buy the things Americans can produce - until we identify a credible engine of growth, talk of recovery is wishful thinking.
Instead, we have:
1. Massive programs to benefit the bondholders of zombie banks.
2. A PPIP that won't restart lending, but will be gamed by banks and investors. It may also suck dry the FDIC, which was established to protect depositors.
3. Cosmetic, backward-looking initiatives that kick the can down the road.
In sum: Some of the indebted are a lost cause, but mortgage modification should be a top priority: write down principals, convert ARMs to fixed, and give lenders "price appreciation rights," or some other option.
Revolving debt needs to be addressed, too - through payment plans, principal reductions, etc. Or do something else - but let's do something on the scale of the problem, and soon.
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