Same old story, but with an Arthurian ending

At Roubini's EconoMonitor, A New Banking Crisis? by Satyajit Das

Today, there are over $3 trillion in stressed loan assets, compared to around $1 trillion of US sub-prime loans which was the catalyst for the 2008/2009 crisis. The World Bank estimates the ratio of non-performing loans (“NPLs”) to total gross loans is comparable the 2009 levels of 4.2% in 2009.

Surprised? Not really.

It's a mess, the article says. Italian banks. German banks. India, China and Brazil. Developing economies, and advanced economies:

In developing economies, strong capital inflows, seeking higher returns or fleeing depreciating currencies, has encouraged increases in leverage. State policies encouraging debt funded investment or consumption to create economic activity has also led to banking problems...

In advanced economies, many banking systems are also large relative to the real economy. They are also vital in facilitating payments and supplying the essential credit that drives consumption, investment and government spending. Any disruption in financial intermediation quickly results in a real economic slowdown.

And again: "State policies encouraging debt funded investment or consumption... [and] the essential credit that drives consumption, investment and government spending."

You know how it works, right? We think credit use is good for economic growth, so credit use is encouraged by policy. It would happen anyway, but policy makes it happen all the more. So people borrow, and spend the money, and this spending is extra, on top of the spending that would have occurred naturally. And the extra spending leads to growth.

But there is more to the story: The extra borrowing leads to debt. Policy encourages borrowing, and borrowing creates debt. Policy makes credit use unnaturally common, so debt accumulates to an unnaturally high level. And as debt accumulates, the cost of debt increases. You know it's true.

Everybody worries about the Federal debt. Nobody worries about the non-Federal debt. Why is that?

The people who owe all that debt are unhappy about it and want to get rid of it. They don't need anybody telling them they have too much debt. They don't react well when you tell 'em.

The people who own all that debt and make money on it are happy about it and they don't want things to change. So they say private debt's not a problem. For them, of course, it's not.

But for us, it is a problem. And for the economy as a whole, it's a problem. So why can't we solve this problem? Because, for some reason, people seem to see debt as a personal problem, a problem of character and integrity and, dammit, I can pay down my debt, I'll just work a little harder.

Yeah, and you have to respect people for that. But what those people seem not to realize is that it's not all their fault. The system is rigged. The system is set up to get you in debt. The system encourages credit use.

It is policy to encourage credit use. It is policy to get you in debt.

Policy tilts the playing field to put us in debt. Sure, some of us can get out of debt. But not all of us can, because policy tilts the playing field. We'll never get out of debt, and we'll never get our economy out of debt, until we change policy.

The quick and dirty solution is to create new policies that encourage the repayment of debt. If we want to keep the policies that make debt grow extra-fast, then we need some offsetting policies that get us paying debt down extra-fast. That way, debt won't accumulate to an unsustainable level.

And these new policies shouldn't be punitive. Instead, they should help us pay down debt at a faster rate. At least until we get debt down to where the economy is good again.

PS: Paying down debt is also a way to fight inflation. A better way than raising interest rates.