I have an unfortunate sense that the “green shoots” in the economy that everyone is talking about are nothing but dandelions. Sure, forcing $1 trillion of taxpayer money—in direct capital, guarantees, and diminished cost of borrowing—into the banking sector has permitted the major banks to claim solvency for the moment. Yet we should not forget that this solvency has come not through a much needed deleveraging of the banking sector but rather from a massive transfer of the obligations of private banks to the public, with the debt accruing to future generations. And overall loan quality at U.S. banks is still the worst in 25 years and deteriorating at the fastest pace ever.
It’s a terrible mistake to confuse the momentary solvency of the financial sector and the long-term health of our economy.
While we have addressed the credit collapse, we have not begun to tackle the far more daunting, and more significant, structural problems in the economy. Instead of focusing on the green shoots, let’s examine the macro data that will determine our national prosperity in the next generation. These data are terrifying.
The bailouts operate on the theory that taking a trillion dollars form the taxpayers to give to the banks to loan back to the taxpayers will return us to the heyday of borrow and spend excess. But that is simply not going to happen. Working people are aware that debt is bad after the battering they just took and they want to get debt-free. But because all the money in use under the Federal Reserve system is the proceeds of a loan, people MUST be kept in debt or the system collapses.
Therein lies the conflict which may well bring down the country. The financial system is designed to keep people permanently in debt, indeed cannot function without keeping people in debt, and the people do not wish to live that way any longer.
Moreover, if you remove the jobs of the working class, you collapse the foundations of the entire economy. As the cracks work their way upward, higher and higher levels who imagined they were too large or too high to fail start to fall apart and remove the support for the levels which are even higher.
When the cracks reach the very top (and that is the Treasury itself) the whole structure crumbles.