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Why the Crisis Isn't Over

By

And four ways to stop the bleeding.

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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.

Needful Things

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.

No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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