Rosie: “There are no quick fixes”

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Dave Rosenberg, Chief Economist and Strategist of Gluskin Sheff & Associates, argues that the U.S. financial system is still broken. The following paragraphs include a few of his comments:

“The charts below illustrate how focused households, businesses and banks are in terms of maintaining historically high levels of liquidity despite the fact that interest rates are at microscopic levels. This says something about the desire on the part of economic agents to maintain very high levels of precautionary balances, ostensibly because they understand that recession risks are high and that means an emphasis on survival kits.

“But when everyone is building their liquid assets at the cost of not putting the funds to work in the real economy, then what we get is the infamous paradox of thrift. The government is there to help counteract these deflationary excessive savings trends in the private sector, but the problem now is one of high and rising structural deficits and a debt-to-GDP ratio that is a year away from breaking above 90%, which is the Rogoff-Reinhart threshold for when fiscal policy does more harm than good for the broader economy.

“There are no quick fixes to a post-bubble credit collapse. Time and shared sacrifice are the only viable solutions and people on this side of the ocean should probably go and ask the folks that endured the Asian collapse and depression back in the late 1990s what it took beyond intestinal fortitude to get to where these “emerged” markets are today (i.e. radical economic, financial and political reforms). By letting failed companies and banks survive with the help of government intervention, what the U.S. government decided to do was to avoid further pain after Lehman collapsed – and what you pay for by putting an artificial floor under the “levels” of output, spending, credit etc, is that it becomes difficult to achieve any meaningful “growth rates”. There may be something to be said to rebuild the system from the rubble, which is what Japan never did but what the other Asian countries managed to accomplish as social contracts were rewritten and sacred cows laid to rest.”

Source: Gluskin Sheff & Associates – Breakfast with Dave, August 23, 2010.

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