IT’S NOT OVER – HERE’S WHY (NO NUMBERS NEEDED)
Sunday April 19, 2009
Eugene Linden
THE U.S. CONSUMER IS STILL DROWNING IN DEBT:
Job prospects are dire. Households can’t pay existing debt, much less get credit.
IT WILL GET WORSE:
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 will 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 cant – Borrowing is now at half pre-recession levels, but lending will not return to credit bubble level. 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) C2Someone 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 will not restart lending, but=2 0will 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 principal, 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.
