Let’s Not Forget The Real Problem


Amid all the howling about “stimulating” the economy and “getting our banks lending again,” it’s worth reminding ourselves of the real problem, which no one in the government dares address.

Robert Albertson, Sandler O’Neill strategist, in Barrons:

You have to look at this from the economic side, and then from the financial-sector side. On the economic side, all consumer debt is at 130% of income. Go back to 2000, and it was at 100%; 10 years earlier it was at 80% or 90%. It has to come down. So the first step is that we have to deleverage, probably by 10 to 20 percentage points, to repair the consumer’s balance sheet.

Also, the savings rate used to be 10% to 12% of income, but it went to zero, and it is back up to 3%. It probably has to go back to somewhere near 10%. So, let us just say we got a 25% correction in consumer income, which is about $10.5 trillion.

That is a $2.5 trillion headwind of income that has to go toward debt reduction and savings, as opposed to spending. But no government-stimulus program is going to offset that effectively. To me, it is a two- or three-year process…

How effectively has the government responded to this crisis?

I’m seeing very odd interpretations from the government, in particular about what we need. The government isn’t thinking about deleveraging. The government is talking about jump-starting consumer credit. I hear the word jump-start all the time. It is such a bad word. Jump-start consumer credit for what? So we can be more indebted?

So what has to be done?

We need to reduce the debt. If you jumpstart credit, you are just going to prolong the problem and deepen it. What we need now is the patience to de-lever. We don’t need the stimulus package. We need a savings package, but that couldn’t be further from the goals at the moment. The mistake is that the government believes credit drives the economy, instead of the economy driving credit. They have got that backward, and this is a very dangerous time to be misfiring…

But assume that consumers repair their balance sheets. Doesn’t that make it harder for gross domestic product to recover?

There is no choice; that is where we are. We should have had this decline in consumer spending in 2000, along with the corporate sector decline that should have been the recession that reset the economy. We have a cyclical economy; that is normal. We had an 18-year expansion, which had never happened before.