Krugman: “It’s a Household Debt Problem; Not a Banking Problem”

“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…..”

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