Credit were Credit is Due

This item shows were far too many folk’s heads are at. Even the pros are in denial over what has taken place. The USA in particular but not necessarily anybody else throughout the world has destroyed their credit granting system. This means that the USA will not be reentering the global economy as a force until this is properly repaired. The rest of the globe has eaten severe damage but it did not destroy their retail credit system. It was not overly strong elsewhere to begin with, so the collapse of national lenders, painful corporately, does not reach down to the retail customer in quite the same way.

The US credit system was anchored on real estate equity and future equity supported by consumer cash flow.

The real estate equity has evaporated and the only solution other than the solution that I have put forward is to allow the housing inventory to stagnate at a price level were no one can afford to sell and until such time as all the inventory has been sold on into stronger hands. This must take years and could easily take a decade. Lenders that are still alive can now only lend on the basis of cash flow. This is a much different proposition. It makes lending much more conservative.

In the meantime, we are discovering that desperate credit card companies have been gaming their clients in all sorts of ways to attempt to collect the maximum interest rate. So unless you have a support staff worthy of a loan shark yourself you are very vulnerable regardless of how good you think your credit might be.

The reality is that the lending industry is systemically destroying credit through stupid desperation. Yet their only escape is through the same financially healthy customers they are assaulting.

That is why my equity take back method of managing the first step of a foreclosure is so powerful. It allows the debtor to rebuild credit and security quickly enough to bail out even the bank at the end of the day.

Today we have a choice. Continue with a decade of stagnation by not repairing the credit system as occurred in Japan as repairing it now. Money to the lenders only allows them to get their ratios back to normal, while money to the borrowers in the form of my prescribed equity take backs turns those same borrowers into credit worthy customers overnight.

Paul Krugman notes that nominal wages are falling for some workers. He worries that this is akin to a paradox of thrift where lower wages lead to less spending and the economy struggles and so on. He then notes that the economy seems to be doing better. BUT:

But the unemployment rate is almost certainly still rising. And all signs point to a terrible job market for many months if not years to come — which is a recipe for continuing wage cuts, which will in turn keep the economy weak.

To break that vicious circle, we basically need more: more stimulus, more decisive action on the banks, more job creation.

Credit where credit is due: President Obama and his economic advisers seem to have steered the economy away from the abyss. But the risk that America will turn into Japan — that we’ll face years of deflation and stagnation — seems, if anything, to be rising.

I want to focus on the first two lines of the last paragraph in this excerpt:

Credit where credit is due: President Obama and his economic advisers seem to have steered the economy away from the abyss.

Tell your children (so that when they grow up and hear this ridiculous story repeated) that the President and his advisers don't steer the economy and that the so-called stimulus package has barely gotten started at the time that the most recent Nobel Laureate was ready to give the administration credit for saving us from the abyss.

I would add that it's a little too early to be optimistic about the future. I hope it's true. But if it is, what does Krugman have in mind when he says, "steering?" What policy can he point to that is keeping us from the abyss?

BTW, if you go
here and click on the frame number 3 you'll see a chart of funds allocated and spent by the federal government in the "stimulus" package. As of the end of April the total spent was still under $100 billion of the $787 billion to be spent. Is this what has kept us from the abyss? Or maybe he means the masterful steering of the financial sector. I'd sure like to know.

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