The U.S. government is following a course of action that is creating a zombie banking system, while it still has the choice to do otherwise, according to John Hussman.
Hussman believes that, while the global economy may appear to be in a rough patch, the world could move forward from this position if it made some tough choices.
With fiscal and monetary palliatives stretched to their limits, it is beginning to appear that the global economy is “up the creek without a paddle” – but this really ignores the fact that the boat has a motor, if we only had the courage to use it. That motor, which would be loud and uncomfortable to start, but would actually help to get the economy moving again, is debt restructuring. In some cases, such as Greek debt, this will require actual losses – a form of debt forgiveness. In other cases, such as U.S. housing, it is possible to restructure the payment stream without the need for subsidies or massive losses (though there will be some adjustment).
By not choosing to use our “motor” and rather continue to support the banking sector, the economy is being drained of the force which could propel it forward.
From our perspective, the problem in the economy is not that banks are over-regulated, but that they are quietly holding a large amount of non-performing assets, and remain unlikely to expand their risk portfolio further. Either we subsidise these assets for years through interest rate spreads that are hostile to depositors, small savers and the elderly, or we initiate approaches to allow the existing debts – particularly mortgages – to be reasonably restructured. Policy makers seem to be on a fairly strong course in favour of the first option – essentially allowing a zombie banking system like Japan’s. It’s a choice, but it comes with the consequence of anemic economic prospects.
So while tiny events like the trimming of reserve requirements give the banking sector great joy, support of the sector is doing damage to the broader economy, and will continue to do so for years to come.
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