From the Pen of A Grumpy Old Man

“The problem is that regulation is like medicine. If I give you the wrong medicine, I will make you sick. If I give you the right medicine, I will improve your health.”
"Black Swan" author Nassim Taleb

In a recent column by Robert Samuelson entitled “Our Allergy to Risk,” the author laments the new American aversion to risk. The major banks are unwilling to lend money to all but the most credit worthy customers, the ones who do not need any money. Individual Americans are reducing their household debt for the first time in a generation. American corporations do not want to borrow any money. Like the American family, they are paying down their debts, buying back stock, and hoarding cash.

Guess what? They finally get it. Excessive debt caused our problems. That is why U-6 unemployment is running around 17%. A record 42,000,000 Americans are receiving Food Stamps. In places like Spain it is worse. Their real estate bubble governmental regulations, expenditures, and borrowing have led to a situation where virtually no jobs are available for the generation that is just now graduating from school.

Excessive debt effectively killed some of the largest banks in the world including Bank of America and Citibank. They are now considered government owned “zombie banks” by many economic authors. Giant financial institutions like AIG and Bear Stearns suffered similar fates. General Motors, once the largest most profitable car company in the world is now the property of the American taxpayer.

Over 25 million Americans are unemployed or are working less than 40 hours a week. Their mortgages and credit cards are going unpaid. Many of them can not sell their house because they owe more than the house is worth. Easy credit to unqualified customers drove the price of residential real estate to unsustainable levels. Now there is hell to pay. As American families are heading for bankruptcy in record numbers, companies (particularly small companies) can not or will not hire new employees. There is simply not enough demand to justify the risk of new hires. Samuelson observes, “Americans are not merely reducing debts. They're erecting protections against unpredicted adversities. For a record 23rd straight month, more than half of U.S. households expect no income gains in the next year.” I know this is true in my case, President Obama announced no raises for Government employees and I am one of the lucky Americans blessed with a good job. Quoting the author of the University of Michigan Consumer Survey, Samuelson goes on to observe, “For many households, the recession's "primary lesson," notes survey director Richard Curtin, "was that the only sure source of financial security was their own savings.”

It’s about time. Nassim Taleb observes that the governments of Europe are beginning to get the message. "I'm not worried about Europe. I'm worried about here more. Europe is a patient who has been diagnosed with cancer and starting chemotherapy. That is the worst moment. Over here we have had a much larger tumor and we have not been diagnosed. When you are pumping more and more painkillers [qe2s], you stay in the same place and there are harmful side effects. Here, we are not yet at a consciousness. The problem we had was not a recession. It was simply a problem of too much debt."

How all this will work out remains to be seen.