The Great Deleveraging

Let the good times roll. Gretchen Morgensen:

THIS see-no-evil approach to second mortgages is part of an overall denial on the part of policy makers, politicians, bankers and regulators that has prolonged the agony of this crisis. Owning up to reality about what loans are worth is rough medicine to take, but denying that problems exist only puts off the inevitable.

“We are much further along the road to price discovery and full disclosure than Japan was at this same stage of their credit contraction,” Mr. Rosenberg said. “There are still some very significant credit problems in the U.S. and as they pertain to commercial real estate are still extremely problematic. Some banks will likely be whipped very hard.”

The challenge for Mr. Obama is that he has thrown oodles of taxpayer money at these problems and still the unemployment rate stands at 9.7 percent.

“We came off a year when you could not have asked for more government stimulus and we lost five million jobs,” Mr. Rosenberg pointed out. “What do you do for an encore? The deleveraging is ongoing and yet the government stimulus is largely behind us. That is problematic for an economic forecaster.”

The fact is, to save the world from economic collapse we have transferred the liabilities of the private sector to the public. And not every country has the money to service or repay that debt.

“We are in a post-bubble credit collapse and there are going to be periods of calm and stormy weather. Investors will have to navigate through the volatility,” Mr. Rosenberg said. “Unfortunately, I think we are still in the early stages. The next recession will happen more quickly than people think.”