The $50 billion or so in Greek debt on the books at European banks is only the beginning. A chilling effect of bad debt is as bad or worse as the headline losses. Lenders shut down. The flow of money in the global economy slows to a crawl. Trust erodes and uncertainty soars, which only sends us deeper into the cycle.
Sound familiar? That credit freeze is exactly what happened after Lehman. Yes, the brutal reality of the mortgage meltdown had started a slow bleed in early 2008, and the shotgun wedding of Bear Stearns and JPMorgan Chase (NYSE:JPM) was alarming.
But it was semi-orderly, backed by the faith and credit of the government. (For what it’s worth, the market actually rallied after the Bear Stearns sale — in part because the Federal Reserve Bank of New York stepped into the breach to help provide financing for the deal and prevent Bear Stearns from just evaporating. Investors felt like the government had their back).
We need Germany to step into the breach this time. But recent hard-line talk from German prime minister Angela Merkel and growing outrage from beleaguered taxpayers shows Europe may not have learned anything from the crash of Lehman and the resulting credit crisis that followed.
Let’s hope Greece doesn’t turn into a painful sequel to the credit freeze incited by the Lehman Brothers failure.
U.S. Debt and High Unemployment Are Secondary Issues
Lest we point too many fingers at the antics overseas, it’s worth noting that the political behavior in America has been equally irrational. Somehow the tenor of our economic discussion has moved away from a troubled financial system to unemployment and now to government spending.
The issues are very closely related, so it’s understandable how we went down this road. But until we address the root cause and restore healthy lending, we will never fix the jobs or the debt issues.
Conservatives seem to think that the national debt is the defining issue of our time. However, any logical person can see that the economic downturn dramatically ate into tax receipts — and the quickest and most effective fix would be to get the economy running again, not to rewrite the tax code.
The president’s renewed focus on jobs is better for the economy but still misses the point. It’s nice to have more school teachers or construction workers collecting a paycheck, but it’s pointless unless stimulus spending props up mortgages and business lending.
Smaller classroom sizes won’t fix the housing market. A freshly paved road doesn’t pay taxes or hire employees.
In short, the credit crisis will continue as banks suffer under the weight of lingering subprime loans and see sluggish performance in “core” lending to Americans who are using credit wisely and responsibly. Without good debt to offset bad debt, our economy is doomed.
Credit is not evil and has been unfairly maligned in this mess. How soon we forget the 2006 Nobel Peace Prize that was awarded to micro-lending pioneers. Millions of poor Bangladeshi women bettered themselves with loans of as little as $100, using it to buy everything from cows to cell phones in order to start their own businesses. Without responsible use of credit, they never would have had access to a better life.
It’s worth reiterating that this was a peace prize, not a prize for economics. There is no greater example to show the importance of a functional credit market — characterized by both honest lending and responsible borrowing — to raise both the wealth of a nation and the quality of life there.
Americans need loans to start businesses, go to college, buy homes, protect themselves in times of crisis and countless other things. The nation needs to re-learn how to use debt as a tool to build and protect wealth, not destroy it.
Juicing jobs numbers or slashing federal spending is nice. But until our nation and our financial system can generate loans, our economy is no better than it was three years ago when Lehman rocked Wall Street.
Jeff Reeves is editor of InvestorPlace.com. As of this writing, he did not own a position in any of the stocks named here. Follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.