June 11 (Bloomberg) -- U.S. household wealth fell in the first quarter by $1.3 trillion as home and stock prices dropped, extending the biggest slump on record.
Net worth for households and non-profit groups decreased to $50.4 trillion from $51.7 trillion in the fourth quarter, according to the Federal Reserve’s Flow of Funds report today. The government began keeping quarterly records in 1952.
One positive aspect of today’s Fed report is that the decreases in net worth are starting to ease. Wealth dropped by a record $4.9 trillion in the last three months of 2008.
But...
If you look inside the Flow of Funds report you will see that total liabilities have decreased by only $178 billion.
That is, asset values have declined at a rate nearly ten times that of the debt in the system against those assets.
This is the definition of the problem:
The so-called "asset gains" were fraudulent and have evaporated into the wind, but the debt taken on to acquire them remains as a millstone around the consumer's NECK!
I keep coming back to this same point, and the data continues to say the same thing:
There is no possible durable economic recovery so long as value is destroyed but debt is not, because as debt-to-equity ratios rise debt service becomes more difficult, credit quality declines, and both of those facts force diversion of income to paying down debt and contracting the consumer balance sheet.
You can keep trying to blow bubbles and you might even "succeed", as we did in 2003 - but you see what it got us. A jobless "recovery" and then a ruinous crash. If we allow this to be attempted again the duration of the 'recovery' will be shorter, shallower, and the resulting crash even worse!
WE MUST STOP BEING STUPID IF WE WANT A DURABLE ECONOMIC RECOVERY FOR OURSELVES, OUR CHILDREN AND GRANDCHILDREN.
The proper course of action in 2007 was to force those who had both lent and borrowed imprudently to liquidate their bad debts. This would have totally screwed the banks that wrote bad paper and it would have bankrupted millions of Americans but the crisis would then be OVER, and cleansed of the excessive debt the economy would have its productive capacity available for consumption and investment.
Instead we have attempted to tamper with interest rates so as to make it possible to service the debt even though assets have declined in value. That is, make it cheaper to borrow.
The problem with this is that there is a corner into which you inexorably get painted: nobody will lend at below the risk-adjusted rate of return and as credit quality declines the risk-adjusted rate of return goes up, not down. Attempting to force rates in the other direction by transferring that liability to a "stronger" institution (in this case the federal government) simply weakens that stronger institution which then causes THOSE instruments to rise in yield and decline in price.
And, in fact, that is exactly what has happened, despite The Fed's monetization and tampering campaigns that they claimed would do the opposite!
The truth is that when you transfer debt to the Federal Government you screw everyone at once, because all rates are indexed off government credit costs.
As a result instead of "defusing" the credit crunch and dissipating it we instead are driving financing costs higher for everyone - Mortgage Costs have gone up instead of down, credit card interest rates have gone up instead of down, etc.
The Federal Government must force the disgorgement of Fed-acquired "paper" back into the companies that issued it, thereby decreasing the risk associated with financing Government debt.
This will cause those institutions that did imprudent things to blow up, just as it would have in 2007. So what?
We need a banking system. We do not need specific banks; where one smoking hole appears in place of a former bank, an opportunity immediately appears for entrepreneurs to come in and open a NEW bank or expanding an existing, smaller one. With proper and prudent regulatory response those who blow up will be seized before losses are taken by depositors (taxpayers), and the investors who signed up for risk will bear the loss as they should.
We must also repeal the "Bankruptcy Reform Act" and encourage those who are underwater with no hope of redemption to declare bankruptcy and throw off their debts.
These two actions will heal the economy. It will destroy those who were imprudent and take their "things", but that does not take their ability to produce! Their human capital remains - the source of all actual GDP (as opposed to pushing paper around.)
We are refusing to demand this as Americans because most Americans don't understand what is going on. Our media is intentionally lying to America because it is owned by the very banking and financial interests who would be screwed if their imprudent lending came back to bite them.
Americans who are PERSONALLY underwater are screaming for a "bailout" when what they really want is a BANKRUPTCY that throws off their debts onto the backs of those bankers who IMPRUDENTLY lent them money that they could not repay. This is the ONLY way those Americans' balance sheets will be cleared and their productive capacity will ever return to their hands, instead of that capacity being absorbed by the slavery of their debt.
The problem with the "bailout screed" is that it can't work. I said so two years ago and now we have proof I have been right - it is NOT working. The debt is still there. The assets have declined precipitously in value and as a consequence the permanent drag on GDP and consumption remains.
The policy has failed and it is time to change it. If we continue to march down this road we will reach the point where FORCED and DRAMATIC contractions occur in government financing capacity, which will lead to an economic collapse FAR WORSE than the 1930s.
This is not conjecture - it is mathematical FACT.
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