My position over the last 2 years has been as follows: this is a Main Street debt crisis.  I have been highly critical of the government’s incessant interventionist policies over the last few years largely because they ignore the actual problems at hand.  First it was Mr. Bernanke saving the banks because he believed the credit crisis started with the banking sector.  The great monetarist gaffe ensued.  Tim Geithner piled on with the PPIP.  FASB jumped on board the bank rescue plan by altering the accounting rules.  And then the icing on the cake was the Recovery Act, which, in my opinion, just shoveled money into the hole that had become the output gap, without actually trying to target the real cause of the crisis – those burdened by the debt.  In essence, the various bailouts primarily  targeted everyone except the people who really needed it.

A year ago I posted a story citing the many reasons why we were sinking into the deflationary Japanese trap.  The primary flaw with the US response to the crisis was that we never actually confronted the problem at hand.  I have often cited Japanese economists such as Richard Koo who appear to have a good grasp on the problems in Japan and now in the USA.  In this case, I cited Keiichiro Kobayashi who is now looking most prescient:

We continue to ignore our past and the warnings from those who have dealt with similar financial crises. Keiichiro Kobayashi, Senior Fellow at the Research Institute of Economy, Trade and Industry is the latest economist with an in-depth understanding of Japan, who says the U.S. and U.K. are making all the same mistakes:

“Bad debt is the root of the crisis. Fiscal stimulus may help economies for a couple of years but once the “painkilling” effect wears off, US and European economies will plunge back into crisis. The crisis won’t be over until the nonperforming assets are off the balance sheets of US and European banks.”

Read that last paragraph again.  These are scarily accurate comments.  While the USA claims to have many economists who understand the Japan disease and/or the Great Depression the policy actions we’ve undertaken do not appear to be in line with any understanding of this history.

What we’ve done over the last few years is repeat the mistakes of Japan’s past.  Instead of confronting the debt problems head on we have simply tried to fill the output gap with short-term spending plans and impotent monetary policies.   As Kobayashi presciently said, the “bad debt is the root of the crisis”.   I think most mainstream economists, the administration and the Fed have continually misdiagnosed our problems.  They have attempted to save the banking sector and simply fill in holes with spending plans that prop up markets, entice more borrowing and largely ignore the actual cause of the current crisis.  Some economists have argued that the Recovery Act didn’t fail, but that it was too small.  This is like saying that the cancer patient didn’t receive enough percocet.  More percocet isn’t the cure.  Targeting the cancer and trying to cut it out is the cure.  Yet, we continue to ignore the lessons of Japan despite having so many “experts” on the Japanese disease.  Therefore, we appear destined to repeat their horrid economic history assuming our current path isn’t miraculously altered.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

More Posts - Website

Follow Me:

  • Patrick

    ” I think most mainstream economists, the administration and the Fed have continually misdiagnosed our problems. They have attempted to save the banking sector and simply fill in holes with spending plans that prop up markets, entice more borrowing and largely ignore the actual cause of the current crisis. Some economists have argued that the Recovery Act didn’t fail, but that it was too small.”

    I wish it were just misdiagnosed. I think there is more truth in Rahm Emanuel’s, “Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to do things you couldn’t do before.” than we want to admit. The inherent bias of government is to intervene especially if it leads to the growth of government. The coming Repubs will pretend to curb this growth.

  • GMH

    “I think most mainstream economists, the administration and the Fed have continually misdiagnosed our problems.” I think the government and Fed run the country to serve those with the money that put them in office. Presumably their interests differ from the general population. Therefore we have “the” problem seen differently by “them” and us. Their actions reflect the problem from their viewpoint. I wonder what that viewpoint is and where it is intended to lead the country.

  • non_economist_fortunately

    Richard Koo is a Chinese born in Japan educated in U.S., just to clarify.

  • Vick
    “The 10 Banks That Received the Biggest Bailouts Spent the Most on Lobbying”

    Doesn’t that say a lot right there…

  • Paul

    I recently read some cases about the Iceland’s crisis.
    First they totally ignored their problem…just like an alcoholic. Saying that it wasn’t their fault that their country get bankrupted but foreigners’ one.
    It was hard to aknowledge their sayings when analysing the ratio debt/GDP…anyway although some banks were nationalized, the FMI granted a loan they finally recognized it was part of their fault and start the “cure” with all the population behind the government namely cutting the budget and stopping some expenses – even getting “back to the basics” (fishery for this country)
    I think the problem for the US and certainly for the decision-maker is to make people conscious about the fact that the excessive consumption created the crisis. It’s hard to live (sustainbly) above the revenues but unfortunately we are in a world where consumption is pushed, either by marketing or sometimes ego. People educated have a more critical view on these problems…but average and below-average people don’t.
    My point is that next to finding solutions to re-balance the budget, there is a real need to educate people about basics economics! Not only take decision but explain.


    PS: Never forget also that the objective of politicians is to be re-elected…with some shortcuts this creates a well known agent-principal problem!

  • first

    TPC you are not very optimistic but as usual you are very likely correct.
    There are fear mongers that make there living exaggerating every thing but this time it’s raining and it time to have an umbrellas.

    “Some economists have argued that the Recovery Act didn’t fail, but that it was too small.”

    Even if the stimulus is only a placebo that can create mostly non permanent job it is almost completely neutralized by excess reserves. If the over all money supply is not moving up or most likely is going down it does not take an economist to know what is going on. When you go fishing in a lake that has less fish then the preceding season the over all result will not increase.

  • F. Beard

    A moral approach would reveal that borrowers were driven into unserviceable debt and that savers were cheated of honest interest rates by our money-for-debt scheme known as fractional reserve lending. Thus both should be bailed out BY PRINTING some new legal tender fiat and distributing it to the population.

  • stpioc

    It is curious that you continue to embrace Koo’s analysis yet recoil from his remedies.

    1) The private sector is repairing balance sheets. To keep the economy from spiralling into a 1930s style deflationary cycle (or worse, a debt-deflationary vicious cycle), the public sector HAS to increase spending, especially as you claim monetary policy is largely powerless (we agree with that).

    2) Evidence showed that it is the main differentiator from what happened in the 1930s and now (at least until now).

    3) The cost of stimulus is highly overstated by many, public sector finances suffers much more from the economic decline (see previous link)

    4) Koo has shown that the public sector balance sheets have indeed been largely repaired, without having caused a 1930s style depression (see previous link)

    5) Yes, banks should have been dealt with differently. There was much better example: temporary nationalization like the Swedes did in the early 1990s.

  • shrek

    Nice honest essay TPC. I dont agree with your MMT argument, but you are correct about the denial of the real problem in policy circles. We have pissed away two years watching a team of semi-retards trying to recreat the same atmosphere that was before 2007. Now are in worse shape with the same problems

  • TK7936


  • first

    Am I correct in observing that recently often when the market moves up very strongly it appears to be at the opening and then it stabilizes for the rest of the day?

  • TPC

    I was in favor of a Swedish response to the banks and a bailout of Main Street. What I was against was this idea of propping up the banks with monetary policy and various asset programs while implementing a spending plan that largely ignores the actual problem of debt.

    My only minor argument with Koo and Krugman is that I think their spending plan is too broad and not targeted enough on the actual problems.

  • oldchicago

    The only solution is that government must contract dramatically. Some will starve, some will attempt revolution. But the contraction will happen, it’s only a matter of when. The sooner it happens the fewer will starve or will throw themselves (or be thrown) against the balustrades. Le the events begin!

  • stpioc

    We’ll agree then, although nationalizing banks (even temporary) is probably not done in the US, even at a time when bankers were very unpopular.

    Targeting spending, yes. By all means. There were the biggest bang for the bug can be attained, for instance improving the structural characteristics of the economy, not just the usual pork. Economic, rather than a political rationale, but this is probably beyond the capabilities of the body politic..

  • first

    “Let the events begin!”

    Japan December 29, 1989 closing at 38,915.87.
    August 31, 2010 closing 8,869.74.

    Thank God thaey can’t default.

  • sje

    We just seem to refuse to accept the painful write off of debt that needs to be.

  • VCC


    Given your commentary on the balance sheet recession, do you plan on shorting significant chunks of the downward fall? We can presume that the wrong medicine on a seriously ill patient will cause great suffering.

  • TPC

    Ideally I would, however, I think it’s dangerous to build shorts right now. If the market is about to collapse then it’s about the most widely known collapse ever. Markets don’t tank when everyone is this bearish unless there is some sort of extreme event (which isn’t occurring currently). I think the April period when I was very negative (and short) is a great example.

    I have actually been looking for a spot to get long even though my macro outlook is negative (which it has been for several years).

    I’ll keep you posted.

  • John Mc

    This is a surprise. What would you be looking for as a reason to be long? A short term trade? Given your macro outlook, which if I remember right you believe will last at least another 1 1/2 years with more pain to come, I’m wondering what you would view as an entry point worth the risk?

  • John Mc

    Not trying to be a smart ass — honest. I’m just trying to learn how smart traders think. Two days ago I asked if you thought the bearishness was too thick and you said yes, but that a market can continue down through lack of buying interest. Strong day today, yes, but I wouldn’t classify the buying as investors tripping over themselves to get long. All the buying took place at 3 am and for 5 minutes after 10 am.

    So what would your rationale be for going long? I’m assuming you mean US equities? What thought process are you going through that makes you even think that you should be long unless it’s for a counter trend rally? You manage money now, correct? Are you currently all cash, and looking to deploy a small amount?

    Again — I’m not trying to play gotcha, but I read you every day and this post caught me flat-footed. You’ve been increasingly disgusted with the macro outlook, and have pointed out that the market is pricing in estimates that will never be reached? Sure, we came down in August but we’re still up 50%+ from the lows, so why even think of being long? I’ve been thinking that I should put some cash to work for a while but have held off thinking that I’m just letting the cash burn a hole in my pocket so to speak.

  • pezhead9000

    I saw that comment too. TPC, would you elaborate – was it because everyone was saying ‘bear’?

  • billw

    It does not matter what the government does anymore, except for a few days rise in the market here or there. The one thing that has to happen for the market to stabilize is for businesses to show revenue growth long term. In this environment that will not happen. The Fed can doe QE 2,3,and 4 and we are going nowhere. As the continued news of decreased earnings by businesses pours in, the analysts will have to adjust their earnibgs forecasts and that will lead to a steady bleeding of investment money from the market.The Austrian solution is the only solution; our choice is to take it fast and get through it or draw it out for another 20 years.

  • TPC

    But don’t read too much into my words. Talk is cheap. I am cash as far as equities go. I am LOOKING to get long, but am not yet….There is some chance if the risk reward unravels here (market moves higher) that I have missed my opportunity….

  • John Mc

    Hey! Who said I was 50!? I’m only 49 dammit. Anyway – you answered my question. I wasn’t looking for specifics, but just to know if this was a short term play, or a long term “put a stake in the ground” kind of investment.

    I too was looking for a wash out, and thought some correlation between the regional fed surveys and the ISM would start the rinse cycle. Simply amazing how this “surprise” number came out right at the 1040 support, and wouldn’t you know, they closed the market right at the first level of resistance. Purely random I’m sure. It’s enough to make a cynic like me believe in conspiracies.

  • Andrew

    You are exactly right. We are repeating the history of Japan during the 1990s. We went through the lost decade this last decade, this decade will be catastrophe and the following decade will be the attempt to rebuild.

    This is also a Main Street debt problem. There are so many fallacies to Main Street because it’s even more corrupt than Wall Street. Why? Because it has the power to legislate, while Wall Street just has the power to influence.

    Watch the November elections.

  • TPC

    That wasn’t directed at you!!! :-)

    But feel free to ask me specifically any time. My macro writing can get mixed up with my trading view, but you’ll know when I am long or short because I’ll tell you spcifically. I’m here to help as best I can, but the reader should recognize that it would be impossible to replicate what I’m doing and that it’s impossible for me to guide you thru the markets with the precision and attention that each individual portfolio would require.

  • Josh

    I’ve actually just been thinking about that. How long will we spend DISCUSSING doing things before we actually DO something. Talk is cheap (literally, in this case) we need to take ACTION! If we don’t, we’ll just sink deeper, and deeper, and deeper until we finally talk ourselves to death. It’s a wonder this country has survived this long when nobody does what they promise to do, and nothing is ever just DONE.

  • John Mc

    Got it. Many thanks for that and running a great site.

  • Rob Luk

    Agree. Give $50,000 to every adult with income below $250K (or some magic number). Those with debt use it to pay it down. Consumers AND Banks get their balance sheets repaired. Those without debt are rewarded for living within their means.

    But politically impossible.

  • van


    Speaking of history, have you seen this?