The Fed has just unveiled a plan to pump in more money to prop up lending to consumers and small businesses. The plan is to buy securities backed by car/student/small business, etc. loans. I understand the point is to prop up the economy. But will this just get us back to where we started? I have been an advocate of saving banks, not to loosen up the credit market but to not have the entire financial system collaspe and spark WWIII. I do not understand why the government says that living beyond our means has gotten to this point and at the same time wants to promote what got us here. At some point we have to change the culture of leaving beyond our means that has existed for almost thirty years now. The problem is that change will require some pain in the short term because we have alot jobs that have been built on easy credit, that will not come back if the credit is not available for people to make purchases. I understand that the politicians want to stem this downward spiral, but I believe that these methods only will delay a worse period. This is not a criticism of the stimulus plan, it is a criticism of attempts to "loosen up" credit markets. My job is being affected by the tightening of capital out there, so I also understand that we have gone to another extreme on credit requirements. However I do feel at some point we will return to normal lending standards in time. I believe, this is not where attention should be focused, but I understand the attempts to revive the economy through credit. What should the policy be? Should we try to loosen up the credit markets, or let credit standards come down to normal levels on their own?
Credit markets can't be loosened until they correct. A trillion $$$ hasn't made a small dent. Anyone saying they are going to loosen credit is speaking purely politically. The fundemental problems are based in overleveraged debt and until there is a constriction in the debt the global economy is going to keep shaking a little longer. IMO as long as the most powerful global investors have confidence in the US then we should be able to keep government debt increasing. This will hopefully soften the landing for the current economic contraction. Once global corporations purge themselves to be profitable (big loss in jobs as you posted) and the economies recover from all the debt issues then there will be a rebound. Something has to kick start corporate growth. With central banks in control debt based economies will always have these cycles. Credit expansion balanced with corporate growth. But there must be corrections when credit gets too leveraged and poisonous debt starts a meltdown. Hopefully the job losses will not be severe before the correction runs its course. Nobody wants deflation and nobody wants inflation. That is the danger of the position. Once people are able to save money, pay down credit and buy things without credit then normal economic growth will resume assuming that we still have a profitable corporate base in the US.
After reading more about what AIG did and the load Fanny and Freddie have, I suspect that those troubled assets we took in as collateral from them and other financial institutions is a constant reminder of the government's plan to make money or at least not defaulting. The cash AIG placed in subprime debt supposedly will mature in two-five years. It seems like the government is still clinging on to the hope of being able to sell those securities for profit by becoming the giant hedge fund of last resort. So housing prices would have to stop falling, but if there were a true correction, housing prices would likely fall even more... I think if there were a viable solution to force people to live within their means, the Bush Admin would have likely implemented it during the crisis. Their financial planners were the supposedly the most deadset against corporate and public moral hazard...
I personally don't think this is true at all, but why did they not at least try? Bush used his bully pulpit to tell people to go on their lives as normal and buy stuff after 9/11, and people responded. (I'm purposefully ignoring the effect of lowered interest rates.) Why not, during financial collapse, use his bully pulpit to tell people to save their money in good banks and pay off consumer debt? It would have sharpened the recession, but it is the right thing to do long term.
This is the same thing as trying to artificially lower the mortgage rate, pump up people's credit all to prop up the housing market. I doubt its going to work, everything is unwinding fast. Its not really a subprime problem, its a debt problem. We just borrowed way too much, total consumer debt is like 100% of the GDP. Its going to be painful going back down to rational levels.
total debt is around 60% of GDP. it's been around 60% since the early-90's. we've had periods of our history where it exceeded 100%...around 120% after WWII. remember after WWII we had an assload of debt...and we ended up with a 90% tax bracket to try to address it.
