Having just finished Paul McCulley's 'The Paradox of Deleveraging' I said to myself, "This man must be in banking" but then I reread Mr. Mauldin's intro and saw that it makes even more sense McCulley works for a fixed income asset manager who has a vested interest in being able to offload funky mortgage and other asset backed securities.
The personal savings paradox only holds true in a closed national economy or a national economy that doesn't want to run up current account deficits like the U.S. seemingly does. If U.S. consumers save a little more and and buy less from overseas, this strengthens the U.S. as a whole by decreasing the flow of wealth out of the U.S. to our trade "partners": the Middle East, China, etc. This combined with the weakened dollar allowing for competitive pricing of U.S. produced goods makes us stonger. Instead of foreign central banks buying up U.S. Treasurys and hoarding U.S. dollars with their citizens' money, these bankers should convince their governments to lower taxes so that their citizens can buy more goods produced in the U.S.
There are other reasons that financial institution deleveraging is stalling out. Publicly traded banks and their CEOs are "managing losses" by taking them a little bit at a time. We keep hearing that no more capital needs to be raised and the writedowns of asset values are over. But every month we learn of more asset writedowns and new investors providing capital to financial instutions want common shares now, not preferred. By managing losses bank CEOs get to keep their jobs longer, rather than taking immediate big bath writedowns and resigning like they should. There is no way in Hades Kerry Killinger of WaMu should still be in his job as CEO.
The other reason banks are not unloading their assets faster is there is no proper pricing mechanism right now for those securitizations created by the idea that traditional lending heuristics can be replaced by combining weak credits with statistically low chances of defaulting simultaneously, or at least that was the bill of goods sold by the underwriters, the credit rating gencies, and the bond insurers. Since traditional lending heuristics were not used to create CDOs, traditional valuation techniques won't work. How do you value NINA, NINJA, and LIAR loan portfolios created partially with bogus appraisals?
It makes no sense whatsoever for U.S. taxpayers to buy funky assets if these assets cannot be priced. Does the Treasury pay whatever the banks say the portfolios are worth and do we think the banks will ask for a fair price? I think not! The only thing dumber than overpaying for something and hoping for the best is overpaying with debt, which is what the U.S. taxpayer would be doing by swapping Treasurys for the funky assets.
Keynes was no economic genius, he was just a very persuasive, old money, Cambridge grad who only took one economics course while there. Politicians of all stripes abuse Keynesian economics to fund projects that help keep politicians in office.
Finally, there is nothing the most brilliant microeconomist can tell you that a small business owner, the household money manager, or a mediocre accountant cannot tell you but with a better explanation. Let microeconomists go back to counting utils and keep them out of the pockets of U.S. citizens.
Friedman left us too early.