Sunday, February 08, 2009

A Historian's View of the Economic Situation

Niall Ferguson:

The harsh reality that is being repressed is this: the Western world is suffering a crisis of excessive indebtedness. Many governments are too highly leveraged, as are many corporations. More importantly, households are groaning under unprecedented debt burdens. Average household sector debt has reached 141 per cent of disposable income in the United States and 177 per cent in the United Kingdom. Worst of all are the banks. Some of the best-known names in American and European finance have balance sheets forty, sixty or even a hundred times the size of their capital. Average U.S. investment bank leverage was above 25 to 1 at the end of 2008. Eurozone bank leverage was more than 30 to 1. British bank balance sheets are equal to a staggering 440 per cent of gross domestic product.

The delusion that a crisis of excess debt can be solved by creating more debt is at the heart of the Great Repression. Yet that is precisely what most governments currently propose to do

And, of course, the Left's mindless retort: "Bush did it, too!!" Kinda reminds you of the children's excuse, doesn't it?

Yes, he did. And he was wrong, wrong, wrong. And it's also useful to recall that Congress was (D) for the last 2 years of his regime.

The born-again Keynesians seem to have forgotten that their prescription stood the best chance of working in a more or less closed economy. But this is a globalized world, where uncoordinated profligacy by national governments is more likely to generate bond market and currency market volatility than a return to growth

Ferguson advocates a temporary and partial bank-nationalization for the loser-banks, which are by no means all, or even a majority of them. And he frets that the US may have to default, which is a big problem, not a little one.

But the UK will get there first.

HT: Dreher

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