Not if circus, obfuscation and deflection continue to prevail

Ronald Solberg has a must read article up at Asia Times online which says that the end of the recession is NOT near at hand. His analysis is logical and compelling.

The dire condition of the banks suggests that their willingness and ability to lend will constrict further, putting even greater pressure on the economy. As the economy slows and consumers increasingly retrench on spending due to the imminent need to save, asset quality problems for banks will spread to other products, including credit card delinquencies, auto loans, home equity loans, student loans and commercial real estate.

It is also likely that there will be a substantial up-tick in delinquencies on corporate, municipal and state bonds as companies, cities and states alike find that large and growing deficits cannot be solved merely by expenditure reduction and tax hikes. We are in the midst of a profound, secular debt de-leveraging cycle for which cyclical policy adjustments will struggle to reverse.

Paulsen and Federal Reserve chairman Ben Bernanke have clearly shown their hand: they will throw as much money as needed to support any major financial institution (or perhaps even markets themselves). However, their balance sheets are not limitless either and debt monetization may ultimately occur. This policy response would have enormous consequences, ranging from huge moral hazard risks, incipient inflation, increasing regulation, misallocation of resources and higher taxation.

The woeful American middle-class will have a steep price to pay for these largely unquestioned and autonomously imposed policies that bailout the fallout from Wall Street's greed, avarice and the gross regulatory mis-management by the Federal Reserve over the past two decades. A secular decline in the standard of living of the American middle class is a very likely prospect resulting from increased taxation, inflation and perhaps even the loss of seniorage from the diminished prospects for the US dollar as the world's reserve currency. Will anyone be held accountable? Not if circus, obfuscation and deflection continue to prevail.