Daily Reading: January 16, 2009

Bank of America loses in the 4th quarter. Reuters.

More bailouts; this time it's Chrysler Financial. AP. I get the feeling that the financial system isn't as stable as Bernanke et. al. would have us believe.

Disinflation continues. WSJ. It seems likely that we will be hearing the word 'deflation' a lot more in the near future.

There were several layoff anouncements today: Pfizer, AMD, Hertz, and Wellpoint. Plus Circuit City will be liquidating, which will put an estimated 30,000 people out of work. WSJ. I don't think the employment picture will be improving anytime soon.

The Feds are considering creating an "aggregator bank" to remove bad assets from bank's balance sheets. Bloomberg. Isn't that the original intend of the TARP program?

The federal government seems to be obsessed with the idea of lending. The theory goes: The economy has stalled because banks are not lending. So if the Feds can force banks to lend the economy will recover.

I am not convinced that a lack of current lending is the problem. It seems to me that an abundance of lending throughout the last decade is the real problem. America is over-leveraged. We have borrowed money to buy stocks, real estate we can't afford, cars, furniture to put in the house we can't afford, vacations, clothes, Versace handbags, and anything else our little hearts desired. And now we have run out of borrowing capacity; we realize that we can't afford all of this stuff. The next logical step is to begin reducing our burdensome debt, i.e. deleverage. So now, rather than eating out 4 times a week and going to the mall every weekend, we are spending within our means (using cash instead of card) and selling assets to prepay debt. America is finally acting prudent with its financial resources. We don't want Uncle Sam to force-feed us with borrowed money!

The process of deleveraging is likely to be long and quite painful for some. But it is a necessary step to put us on the path towards long-term economic prosperity.