9/14/2011 - Massive default is best way to fix the economy?

Source: MarketWatch

NEW YORK - You want to fix this economic crisis? You want to put people back to work? You want to light a fire under the economy?


There’s a way to do it. Fast. And relatively simple.
But you’re not going to like it. You’re not going to like it at all.
Default. A national Chapter 11 bankruptcy.


The fastest way to fix this mess is to see tens of millions of homeowners default on their mortgages and other debts, and millions more file for bankruptcy.


Fears of recession, tough trading conditions, an ocean of unresolved litigation and the worsening euro-zone mess have delivered a real pounding to bank stocks this summer. Former Goldman Sachs partner Roy Smith joins Mean Street to offer a solution: Break up the banks.
I told you that you wouldn’t like it.


I don’t like it much either. It sticks in the craw that people got to borrow all that money and won’t have to pay it back.


But you know what? The time to stop that was five or 10 years ago, when the money was being lent.
It’s gone.


And mass Chapter 11 is, by far, the least obnoxious solution to our problems.
That’s because the real cause of our economic slump isn’t too much government or too little government. It isn’t red tape, high taxes, low taxes, the growing divide between the rich and the poor, too much government debt, too little government debt, corporations, poor people, “greed,” “socialism,” China, Greece, or the legalization of gay marriage. It isn’t, in short, any of the things all the various nitwits say it is.


We’re hocked up to the eyeballs, and then some. We’re at the bottom of a lake of debt, lashed to an anchor. American households today owe $13.3 trillion. That has quadrupled in a generation. It has doubled just in the last 11 years. We owe more than any other nation, ever. And for all the yakking about how people are “repairing their balance sheets,” they’re not. From the peak, four years ago, they’ve cut their debts by a grand total of 4%.
And a lot of that was in write-offs.


More than a quarter of American mortgages are underwater. Many are deeply underwater. In states like Nevada and Florida the figures are astronomical.


The key thing to understand is that most of that money has gone to what a fund manager friend of mine calls “money heaven.” Most of these debts will never, ever be repaid in real money. Not gonna happen.


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