Monday, March 23, 2009

Via Mish at Mish's Global Eco Trends....


Five Misconceptions


Myth - The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it.

Myth - The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back.

Myth - Bad assets are "bad" because the market doesn't understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are.

Myth - Once we get the "bad assets" off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they'll sit there and say they are lending while waiting for the economy to bottom.

Myth - Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they'll be working it off for years.
Below is a pretty popular chart - Total Credit Market Debt as a % of GDP. It's apparent to me that MORE debt is not the answer to this crisis.

Enjoy the bear market rally while it continues but keep your eyes open at all times....

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