America overcomes the debt crisis as Britain sinks deeper into the swamp

[BrilloPad]

The big difference is that in the US a homeowner in negative equity can default and the bank takes the hit. So post bubble home values return to normal and the level of debt falls quickly.

How have the US banks been able to take the hit? I reckon if same laws were applied to the UK a few banks would go under.

[doodab]

The big difference is that in the US a homeowner in negative equity can default and the bank takes the hit. So post bubble home values return to normal and the level of debt falls quickly.

[BrilloPad]

USA seems to have the advantage that the GDP has recovered a little. The biggest difference seems to me to be the house price drop. IMO the government should target house prices and reduce them to affordble levels.

Cutting red tape would help too.

[AtW]

The latest report on "Debt and Deleveraging" by the McKinsey Global Institute shows that total public and private debt in the UK is still hovering at an all-time high. It has risen from 487pc to 507pc of GDP since the crisis began.

As the chart above shows, as recently as 1990 Britain’s debts were still just 220pc of GDP. Has a rich country ever been debauched so fast in peace time?

The ordeal of belt-tightening will be grim, dragging out for a generation if Japan is any guide. The Japanese at least began their post-bubble debacle as the world’s top creditor nation with a trade super-surplus and a savings rate of 17pc. Britain has no such buffers. (AtW's comment: charging tax on interest received on savings is anything but encouraging in UK)

It is a very different picture in the US where light is emerging at the end of the tunnel. American banks, firms, and households have been chipping away at their debts, more than offsetting Washington’s double-digit deficits.

The total burden has dropped to 279pc, down from 295pc at the peak of the boom. Households have purged roughly a third of the excess, roughly tracking the historic pattern of post-bubble deleveraging.

US debt is already lower than Spain (363pc), France (346pc), or Italy (314pc), and may undercut Germany (278pc) before long -- given the refusal of the European Central Bank to offset fiscal contraction with monetary stimulus.

One is tempted to ask what all the fuss was about in the US. The debt of financial institutions is just 40pc, compared to the UK (219pc), Japan (120pc), France (97pc), Germany (87pc) and Italy (76pc). Bank debt has dropped from $8 trillion to $6.1 trillion -- accelerated by the Lehman collapse -- as lenders rely more on old-fashioned deposits.

Tim Congdon from International Monetary Research said US banks were never as damaged as claimed and now have the highest capital ratios in over thirty years. The rate of loan write-offs has dropped from 3.2pc to 1.9pc, a faster improvement than after the financial crisis of the early 1990s.

"There has to be a prospect that Fed funds rate will move back to a more normal level – say, 2pc to 4pc - over the next couple of years," he said. If so, this will come as an almighty shock to the bond and currency markets. Almost nobdy is prepared for such a turn of events.

In hindsight, the US property boom was was remarkable modest compared to what happened in Spain, or what is happening now in China now where the house price to income ratio in Beijing, Shanghai, and Shenzhen is near 18. America’s ratio peaked at 5.1 and is already back to its modern era average of three. The excesses have been unwound.

Personally, I am coming to the conclusion that the US crisis in 2008-2009 was largely a case of botched monetary policy and could easily have been avoided. The growth of M3 money -- which the Fed stopped tracking thanks to a young Ben Bernanke -- was allowed to balloon in the bubble, then collapse in 2008. "

Source: America overcomes the debt crisis as Britain sinks deeper into the swamp - Telegraph