Truisms of a Financial Crisis

So much information and so many ideas come to us daily in the financial press. We’re able to fill up our trash basket in just minutes.

In The Financial Times, for example, Larry Summers recently offered a solution to America’s housing debt problem. And in The Herald Tribune our favorite comedian, Thomas L. Friedman, tells us about the next Internet revolution and what a wonderful world it will create.

Meanwhile, stocks appear to be on the march again. The Dow is up over 4% for the week. And oil is back over $90 per barrel.

Once again, ‘recovery’ hopes are building. The Europeans just have to sort out their debt mess. And Americans too!

And that should be easy. There are so many smart people on the job!

In Europe, Monsieur Sarkozy and Frau Merkel — not to mention an army of technicians, bankers and delusional incompetents — are finding ways to solve Europe’s debt crisis. How? By adding more leverage…debt…and confusion. To simplify, today’s bad debt will be guaranteed by tomorrow’s bad debt. The authorities are just hoping that between today and tomorrow is sufficient time for them to get away. It may be a bigger problem, they say to themselves, but at least it will be someone else’s problem.

And who knows, maybe Mr. Friedman will be right. He’s wrong with such conviction and such regularity that there is bound to come the time when he is right by accident. Now he tells us he sees another ‘tech revolution’ coming, this one based on ‘the cloud’ and the social media. Surely this one is going to make us all rich…or make the world a better place…whichever comes first.

He hardly mentions the last tech revolution, which he also thought would make us all rich. It did nothing of the sort, of course. Against all odds, the last decade bucked the course of 300 years of history. With the help of the new technology — at their fingertips — Americans got poorer!

But that’s a long story.

So, let’s turn to Mr. Summers. He tells us that the problem with the US economy is that people have lost too much money on their houses. And if house prices sink further there is little chance that the economy can get out of its present low-growth slump.

Right so far. But what to do about it?

The man with all the answers steps boldly forward and proposes to make a bad situation worse. How would he address the problem of too much mortgage debt? By increasing the amount of mortgage debt!

“It is a central irony of financial crisis that while it is caused by too much confidence, too much borrowing and lending, and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending.”

That may seem stupid to you and other sensible mortals, dear readers. But Mr. Summers sups with the gods, where the rules that cover the rest of us don’t apply. He says the problem with public policy is its “inability to appreciate this truism.”

The real truism is that Larry Summers has never understood what is going on. Nor will he. His whole career is based on not understanding. It’s served him well so far; he’ll stick with it.

The idea behind Mr. Summers’ solution is that you subsidize what doesn’t work; you reward failure. So, instead of abolishing Fannie and Freddie, for example, you give them more money…

Failed mortgage lending is a big drag on the economy. So, you lend more!

You could apply the same logic to other failed industries — such as education. Education spending has soared over the last 40 years. But test scores show there has been no payoff…no improvement at all.

One of the ways the feds shift resources to this zombie sector is with student loans. Bloomberg has the report:

William Prince, of Rosenberg, Texas, knows just how inescapable student loans can be. The 52-year-old father of two started paying off $51,000 in college debt 15 years ago and now owes $57,000. “I don’t expect to pay these loans off in my lifetime,” he says. Prince, a criminal justice major who works in private security, had to defer payments during three bouts of unemployment, and the accumulated interest left him deeper in debt.

Americans now owe about $950 billion in student loans — more than their total credit-card debt. The weight of those IOUs is a frequent refrain for Occupy Wall Street protestors and their online supporters. On the “We Are the 99 Percent” Tumblr blog, which features hundreds of pictures of people holding handwritten signs describing their desperate financial situations, student loan concerns exceed those about children, unemployment, and health care, according to an analysis by Mike Konczal, a fellow with the nonprofit Roosevelt Institute.

Desperation may have something to do with that outcry. Two out of five Americans with federal student debt can’t make monthly payments and either defer, default or are delinquent, according to Mark Kantrowitz, publisher of, a free scholarship-matching service, and, a source of student financial aid information…

We’ll save Larry Summers some thinking. What to do about this trillion-dollar weight of student debt? Lend the students more money!


Bill Bonner,
for The Daily Reckoning

The Daily Reckoning