This is no ordinary slump, says Bill Bonner. We face a “balance sheet recession”, where banks, businesses and investors are forced to cut back after suffering huge losses. Bill says this will take years to sort out. And government efforts to delay the inevitable will just draw out the ordeal.

This from The Daily Reckoning:

Obama is lucky he wasn’t elected a year ago. At least now it is clear that he’s innocent. He comes to the office facing problems not of his own making. Instead, they were made by his predecessors – notably, Alan Greenspan and George W. Bush. Working together, the two bumblers squandered America’s fortune, drove off her industry, and put just about everyone deeper in debt than ever in history. Did two more hapless, more incompetent, more conniving half-wits ever before conspire to create such a mess?

Alan Greenspan courted power and fame. He got both. But you can’t get power and fame without being a jackass. At least, that’s our conclusion after reviewing the history of the United States of America. Just look at the presidents who got power and fame: Abraham Lincoln… Woodrow Wilson… Franklin Delano Roosevelt. The first two got the US into unnecessary and disastrous wars… the last one got the US into an unnecessary and disastrous depression.

Okay… okay… it wasn’t entirely their fault… but it’s our Daily Reckoning, we can exaggerate if we want to…

Alan Greenspan would have been much less popular had he put the brakes on the dot.com bubble in ’97… and the brakes on the housing bubble in 2005. Of course, he probably would have lost his job sooner. But the US would have a much healthier economy as a result.

And talk about unnecessary wars! And unnecessary depressions! George W. Bush has brought us both! No president ever presided over such a spectacular turnaround in America’s fortunes:

…from a fake budget surplus of nearly $300 billion under the Clinton administration, Bush will leave office with a real deficit approaching $1 trillion…

…coming into Washington at the peak of the bubble of 2000… he’ll blow out of town leaving behind an economy in its worst slump since the ‘30s…

…after taking control of the spiffiest, most widely respected country in human history, in 2000, he leaves a country that is widely regarded as broken down… (Russian president Medvedev recently charged the US with causing the world’s financial meltdown… the French believe US-style capitalism is collapsing, like the Soviet Union in ’89… the Latinos now mock the idea of taking financial advice from the US)

…after coming into office lauding the virtues of humble foreign policy and proud capitalism, the US has taken up a breathtaking combination of bombastic military intervention abroad and abject, swinish collectivism at home.

But let’s get back to Obama. Seems like a decent fellow, as near as we can tell. But he has a great temptation to become a jackass.

Obama is beginning to realize what he’s up against. This is no ordinary cyclical downturn. Typically, a slump brings interest rates down. (Usually accompanied by central bank rate cuts.) Cheaper borrowing arouses business and speculative activity… which, in turn, tends to get the economy moving again.

This time, that’s not happening. The authorities are handing out money below the inflation rate and practically begging banks to lend…

But who wants to lend when there’s a danger you might not get your money back? And who wants to borrow when everyone is desperate to get out of debt?

Today’s Financial Times announces that another 70,000 jobs could be lost on Wall Street. Who needs so many employees when no one’s doing any deals? No one’s borrowing… no one’s lending… investors are running scared… and private equity is curled up in a cave somewhere…

Why? Because it’s a ‘balance sheet recession,’ not a regular, cyclical downturn. People have lost a lot of money… and they’re afraid of losing more. So businesses are cutting back as fast as they can. The job losses aren’t limited to Wall Street. Today’s news from Associated Press tells us that there are 10 million people out of work – the most in 25 years. The New York Times says unemployment is at a 14-year high. (We didn’t study the figures to see how they differ; but we predict that the figures in the last quarter of this year will be even more alarming…)

Everywhere, investment portfolios are being trimmed… cash is more than king; it has become a demi-god. This despite the fact that there are some great investment bargains around.

After “Black October,” says the FT, it’s the “buying opportunity of a lifetime.”

Stocks were overpriced for the last 20 years. Now, they’re not so overpriced. In fact, by almost any measure you use, they’re fairly reasonable. Compared to the yield you get from Treasury bonds, for example – a popular method of gauging the stock market – stocks look like a good deal. P/E ratios, too, are in the ‘normal’ range. Or, you can look at James Tobin’s “q ratio” – comparing stock prices to business net worth. Here again, stock prices don’t look out-of-the-ordinary.

But a ‘balance sheet recession’ is an unforgiving, mean, and tenacious rascal. After such big losses, businesses, consumers, investors, and banks need to rebuild their balance sheets – by paying off, defaulting on, or working out their debt. And then they need to rebuild their confidence… with rising asset prices and a growing economy. All that takes years… many years.

Worse, a balance sheet recession is like a straightjacket; the harder you fight against it, the tighter it gets. When government tries to prevent assets from being marked to market, for example, it delays and obstructs the process of adjustment. Rather than let the debts and mistakes be flushed out, they remain on balance sheets… blocking progress, frustrating change.

“Change is Nature’s delight,” said Marcus Aurelius. Trying to stop change – at least in a balance sheet recession – is Nature’s horror. Balance sheets need to be corrected. Until they are corrected future growth can’t happen. So, the whole system is stymied, clogged, stopped up, constipated…. like the US economy in the ‘30s… or like Japan’s economy in the ’90s…

Source: No ordinary slump