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Three very good articles

July 9th, 2010 · No Comments

One very thorough one on the state of European banks, another one from Simon Johnson, former chief economist of the IMF, on failure of financial reform, and then one on the US debt situation. Turns out it’s private debt, not public debt which is (or at least, should be) the main worry..
Flawed Financial Bill Contains Huge Surprise: Simon Johnson

  • [“None of the big financial firms will be affected by this legislative outcome. And Treasury Secretary Timothy Geithner’s approach of “let us raise capital standards” doesn’t seem to have legs. Congress was told to not legislate minimum capital requirements and has duly obliged.”]

EUROPE: THE STATE OF THE BANKING SYSTEM

  • [“In light of Europe’s ongoing sovereign debt crisis and the attempts to alleviate that crisis by cutting down deficits and debt levels, European countries are going to need growth, pure and simple, to get out of the crisis. Without meaningful economic growth, European governments will find it increasingly difficult — if not impossible — to service or reduce their ever-larger debt burdens. But for growth to be engendered, the Europeans are going to need their banks, currently spooked into sitting on liquidity, to perform the vital function that banks normally do: finance the wider economy.
  • Is long as Europe faces both austerity measures and reticent banks, it will have little chance of producing the GDP growth needed to reduce its budget deficits. If its export-driven growth becomes threatened by decreasing demand in China or the United States, it could also face a very real possibility of another recession which, combined with austerity measures, could precipitate considerable political, social and economic fallout.”]

Debt is still the problem and deflation is the painful solution

  • [“They are constantly comparing the U.S. government debt to every other country in the world (especially Portugal, Italy, Ireland, Greece, and Spain-PIIGS).  We believe that the government debt should be taking a back seat to the private debt which is much larger and must eventually be deleveraged.
  • The private debt is about 6 times larger than our government’s public debt; about 4 times larger than our government’s gross debt (including the government debt used to fund our Social Security shortfall);  and about 2.5 times the gross government debt plus the total state and local debt.  Household debt alone is equal to 96% of GDP; private domestic nonfinancial debt is 183% of GDP; total credit market debt is 357% of GDP (see first chart Selected Debt Measures as a % of GDP).  Please note that the only form of debt that isn’t rolling over is the government debt.”]

Tags: Credit Crisis · Reform Capitalism