Why The Greater Depression Still Lies Ahead

Obama, Bernanke pile on debt when de-leveraging is needed.

by Michael Pento

If policymakers do not understand the real cause of a problem, they will in all likelihood be unable to provide a genuine solution.

Messrs. Barack Obama, Benjamin Bernanke and Timothy Geithner do not understand the real cause of this debt crisis. They are politicians first and economists or students of the market second--if at all. Therefore, it is not wise to count on them to tell us when the Great Recession is over, or to provide a plan to prevent another one in the future.

The cause of the Great Depression in the 1930s, and the Great Recession beginning in 2007, was one and the same: an overleveraged economy. Excessive debt levels are the direct result of the central bank providing artificially low interest rates and of superfluous lending on the part of commercial banks.

The easy money provided by banks eventually brings debt in the economy to an unsustainable level. At that point, the only real and viable solution is for the public and private sectors to undergo a protracted period of deleveraging. The ensuing depression is, in actuality, the healing process at work, which is marked by the selling of assets and the paying down of debt.

Unfortunately, our politicians today are focused on fighting this natural healing process by promoting the accumulation of more debt.

During this latest economic contraction, the Federal Reserve took interest rates to near 0%, and the Obama administration is leveraging up the public sector to record levels in a bid to re-leverage the private sector. The government's philosophy is tantamount to sticking a frostbitten man in the freezer so he won't have to suffer the pain associated with the thawing of his extremities.

http://www.forbes.com/2010/06/30/greater-depression-still-ahead-personal-finance-economy.html