Prolonging The Pain

This is well worth the read, but I have a quibble. Here’s a good quote:

To grossly oversimplify, the problem with debt is it sets up fairly fixed future cash flow commitments, of which there is no automatic mechanism guaranteeing that future cash flow generation by the economy will be sufficient to meet. If private sector leverage gets large enough – and Minsky argues there are inherent dynamics that drive the economy in this direction – then the failure to meet contractual commitments can lead to forced asset sales, falling asset prices, and a restricted propensity to invest out of profit income flows and to spend out of wage and salary income flows, all of which can fuel a vicious, self-reinforcing cycle very much like we witnessed from September 2008 to March 2009 before massive policy intervention broke the maelstrom.

I’m not sure that intervention broke the maelstrom. Many observers think there is at least one more shoe to drop, i.e commercial real estate. And it’s far from clear that the home collapse is really over. We may be in a brief pause: the paperwork required to liquidate home mortgages has overwhelmed the system, freezing the system into inaction. That won’t last forever. Mortgages that would normally be foreclosed are sitting dormant due to inattention. The real questions for the next wave is how many and for how long?

The cycle of falling asset prices can’t last forever. Sooner or later, everything that should be liquidated will be liquidated. That’s when good times will return. I remained unconvinced by the arguments that some magic fiscal or monetary problem will make the pain go away. All they can do is prolong the pain.

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