Fixing the Great Repression

Article by Harvard professor Niall Ferguson in The Australian:

IT began as a sub-prime surprise, then became a credit crunch and is now a global financial crisis. At last month's World Economic Forum at Davos there was much finger-pointing - Russia and China blamed the US, everyone blamed the bankers, the bankers blamed everyone - but little in the way of forward-looking ideas. From where I was sitting, most attendees were still stuck in the Great Repression: deeply anxious, but fundamentally in denial about the nature and magnitude of the problem.

There were the people calling the bottom of the recession by the middle of this year. There were the people claiming India and China would be the engines of recovery. There were the people more worried about inflation than deflation. And, above all, there were the people trusting John Maynard Keynes would save us. I heard almost no criticism of the $US800 billion ($1.2trillion) stimulus package then making its way through Congress (and mutating as it went into something more like a pork barrel). The general assumption seemed to be that practically any kind of government expenditure would be beneficial, provided it was financed by a big deficit.

There is something desperate about the way people on both sides of the Atlantic are clinging to their dog-eared copies of Keynes's General Theory. Uneasily aware that their discipline almost entirely failed to anticipate the crisis, economists seem to be regressing to macro-economic childhood, clutching the multiplier like an old teddy bear.

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 important, households are groaning under unprecedented debt burdens. Average household sector debt has reached 141per cent of disposable income in the US, 156per cent in Australia and 177 per cent in Britain. Worst of all are the banks in the US and Europe. Some of the best-known names in American and European finance have balance sheets 40, 60 or even 100 times the size of their capital. Average US 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 propose to do. ...

Read the rest here.

[Via Jack McHugh at The Big Picture]