US banks are collapsing everywhere. Bring on the defaults, it might be the only way the US economy will be cleansed.
The Wall Street Journal reports that Americans have seen the largest amount of bank failures in 20 years with some 279 banks collapsing since September 2008. There are now 7932 banks in the US and there are predictions that could fall to 5000 over the next decade.
But the other way of looking at it is that this could be a cleansing of the US bank market because many of the failed banks were latecomers, sucked in by the lure of cheap and easy money during the boom. Bank assets more than doubled to $13.8 trillion in the decade that ended in 2008. This is a sector that grew too quickly.
The prospect of necessary and cleansing defaults is a point taken up by economist Paul Krugman in the New York Times.
Krugman says excessive private debt created the problem so there is only one way out. "In the end, I'd argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that's how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt."
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