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I found this commentary by Paul Krugman to be somewhat humorous.  2 years after the fact, prominent economists are finally pointing out that we have a household debt problem and not a banking problem:

“You can clearly see the oh-God-we’re-gonna-die period following Lehman’s fall; you can also see that it’s over, and stress is more or less back to normal.

So what’s holding back the recovery? Housing and household debt.

And so the priority in financial policies should be helping to clear up the housing mess and helping arrange debt relief. This is not the time to worry a lot about the banks — and especially not to worry about what bankers say.”

I am not sure why it has taken so many so long to diagnose this problem.  The Fed, for instance, thought we had a credit crisis.  The media was convinced that it was the banks that were the problem.  But the real root cause of the issue was households.  The reason I bring this up is because of my personal frustration with regards to the current economic plight.  I have written letters to the Fed and prominent politicians outlining all of this in very easy to understand language.  In 2008 I said:

“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.

So here we sit quibbling over debt ceilings that don’t matter and Fed policies which are a complete and utter joke.  Meanwhile, the household sector remains the root cause of the current malaise and deeply troubled.  Why was it so hard to see that the mortgage crisis did not start with the banks?  More importantly, why did so many people miss what should have been such an obvious fact? Or were they simply not interested in helping households because their banking lobbyists were too busy creating fixes for the banks?  I don’t know, but it’s pathetic no matter which answer you come up with.

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