Back in late 2008 I wrote one of the more prescient things I’ve written here (yes, it happens on rare occasion!):
“We have a major capital problem at the U.S. banking level. What Ben Bernanke and Hank Paulson are essentially proposing is an asset swap. The Fed will take on the toxic assets of the banks and they will receive reserves in exchange. This is important because it will alleviate the strains in the credit markets. That’s a good first step, however, it is not a solution to the problem at the household level and THAT is where the real economic weakness is. By introducing this asset swap idea Ben Bernanke is simply altering bank balance sheets. He is not fixing the economy.
So, the government has a partially correct solution. Not the BEST solution, but it gets to the core of the credit issues. They will essentially trade the bad paper for good paper and it will alleviate many of the pressures on the banks. As I have written here many times the banks are the lifeblood of the system. I like to think of the banks as the oil in the engine. If you run out oil the system begins to break down and eventually the engine stops running. You can’t have a healthy functioning economy if the banks aren’t lending. Unfortunately, because this won’t fix any problems at the household level it won’t induce any borrowing. So, it’s a clever way to resolve the banking crisis, however, it doesn’t fix the root of the problem which is at the household level.”
These were really important comments. I was, admittedly, still wrapping my head around QE, the lending facilities and what was pulverizing the US economy at the time, but I understood one big macro point – where the disease started. As any good doctor knows, this is crucial in analyzing and attacking any sickness. You can’t find a cure if you don’t understand the cause. Back in 2008 and 2009 we heard endless chatter about the “banking crisis”. But the banking crisis was a symptom of the household debt crisis. So it led policymakers to obsess over ways to fix the banks. This of course, didn’t cure the real problem – the households. And so here we are almost 4 years later still discussing what could have been and why we have a weak economy still….
And now a sad thing is occurring in Europe. I see increasing chatter about a “balance sheet recession” in Europe, debt crisis or even a potential banking crisis. But this is merely a symptom of what’s really ravaging Europe. Europe has a currency crisis. The Euro is unworkable as is. The debt crisis is nothing but a symptom of this much bigger problem. And the sad fact of the matter is, because leaders either can’t diagnose the problem or refuse to accept that their monetary system is incomplete and unworkable, we’re forcing millions to suffer and prolonging the sickness.
Let’s just get this right. Europe has a currency crisis. If you want to fix Europe you need to make these nations autonomous in the Euro or some other currency of their own. That means forming a federal government of some sort and eliminating the solvency fears (essentially a US of Europe) or starting to let some of these nations peel off. The sooner we acknowledge the actual problem the sooner we can get around to fixing it….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.