Roach clip

Stephen, that is:

The problem with the apologists is that they failed to appreciate the deeper meaning of these imbalances. The U.S. current account deficit didn't emerge out of thin air. It was the outgrowth of an unprecedented shortfall of domestic saving. Saving itself was depressed by the illusions of an asset- dependent U.S. economy and especially by the willingness of consumers to live well beyond their means by extracting equity from over-valued homes.

In short, America's external imbalance was joined at the hip to the toxic interplay between asset and credit bubbles. Moreover, denial was global in scope. Export-led economies were delighted to draw support from bubble-dependent American consumers. And now, that house of cards has collapsed.

Repeating Mistakes

Unwittingly, the Depression Foil might well end up recreating this madness. With the risk of a depression viewed as completely unacceptable to the global body politic, the full force of the policy arsenal is being aimed at jump-starting aggregate demand -- irrespective of the consequences such results might imply for a new build-up of global imbalances.

Once again, the U.S. is leading the charge. The Fed wants to get credit flowing again to still overextended American consumers, especially in mortgage markets. The Congress wants to stop the bleeding in the housing market -- irrespective of the persistent imbalance between supply and demand. And the White House wants consumers to start spending again -- to avoid the perceived pitfalls of the "paradox of thrift" brought about by too much saving.

Put it together and it all smacks of a dangerous sense of déjà vu: promoting a false recovery by kick-starting overextended, saving-short American consumers to borrow once again by leveraging their major asset.