Don’t blame the banks for the economic crisis

By JIM LANDERS

We are in a global debt crisis. In some parts of the world and in some parts of the U.S. economy, the extent of the damage isn’t even apparent yet.

The main reason? It wasn’t investment banks borrowing wildly. It wasn’t corporations running up debt instead of issuing new stock shares. It wasn’t the federal government. A new analysis by the Mc-Kinsey Global Institute lays most of this debt at the feet of middle-class consumers — Americans, Britons, Canadians and others — who bought more house than they could afford.

American consumers have responded by paying down their debts, curbing purchases and putting more into savings. Similar actions are spreading across the developed world.

This won’t last for just a year or two. McKinsey’s researchers say deleveraging — reducing debt — typically goes on for six to seven years in the aftermath of a financial crisis.

“In just three cases in our sample were economies able to grow out of debt solely because of rapid economic expansions — and all three were fueled by war, such as the U.S. experience during World War II, or oil booms,” concludes the analysis titled, “Debt and Deleveraging: The Global Credit Bubble and its Economic Consequences.”

If the U.S. economy crawls for the next several years, that’s going to seem especially galling to Texas.

As reported by my colleague Steve Brown earlier this month, David Crowe, chief economist of the National Association of Home Builders, holds Texans harmless:

“You came to this a little bit later than other markets, and it wasn’t your doing,” he said. “You weren’t California, Florida, Nevada or Arizona,” states where home prices collapsed after surging through most of the last decade.

“You really are just an innocent bystander in this recession,” Crowe said.

High foreclosure rates in Dallas, Houston and other parts of the state belie that blanket amnesty, but the bubble was nowhere near as bad in Texas as it was in several other states (and several other countries).

McKinsey researchers suggested there’s more trouble ahead.

“The bursting of the great credit bubble is not over yet,” they found.

Still to come are a raft of triggered adjustable-rate mortgages for residential consumers and staggering amounts of debt due for commercial real estate.

The report found that $1.3 trillion of U.S. commercial real estate loans will come due in the next four years. Refinancing all that debt will be a challenge after the 2008 meltdown in the practice of bundling such loans into marketable securities.

That’s where investment banks had their debacle. Mortgages sold as bonds in markets around the world fell apart with the collapse of Lehman Brothers. Investment banks had a mountain of debt, but not as big as consumer debt.

“Households account for the largest share of total debt in the United States, Canada and Switzerland,” concluded the authors. From 2000 to 2008, U.S. household debt had grown $6.8 trillion. Financial institution debt rose $3.9 trillion. Government debt was up $4 trillion.

Household debt

The average American household increased the amount of debt as a share of household income by a third.

You would expect banks and consumers to tighten their belts in the face of these numbers. As they’ve done that, the federal government was left to pick up the slack in the economy. Federal borrowing has soared, even as the enormous retirement and health care costs of the baby boom generation loom on the near horizon.

McKinsey’s economists warned that curbing federal spending too soon would repeat mistakes that prolonged the Great Depression in the U.S. and Japan’s lost decade of the 1990s.

To keep from repeating this, McKinsey economists urged governments to consider curbing incentives for homebuying, such as the deduction of interest paid on mortgages.

X Jim Landers is a columnist for The Dallas Morning News. Distributed by McClatchy-Tribune.