The problem here is simple: credit is scarce because nobody wants to lend and nobody wants to buy. Why not? Because the Federal Government is threatening to borrow and spend a TRILLION DOLLARS. If you are bank, would you sell your product if you knew that the best customer ever was going to be spending a TRILLION dollars soon?
Of course not. Even if they choose not to buy from you, the price of lending is going to go up. It can't help but go up, not when a TRILLION dollar buyer is showing up. So nobody is lending now.
And nobody is buying anything now. Why would you? You want to be positioned correctly for the TRILLION dollars which is going to enter the market soon. You don't want to invest your money in something, only to find that the market has shifted and your investment is toast.
It’s pretty silly to think you can solve a problem created by too much borrowing and spending by doing a lot more borrowing and spending.
If everyone followed that logic in everyday life, imagine the results:
“Gosh, I’m forty pounds overweight now. I better start eating more.”
“Honey, you’re getting too many speeding tickets.” “Well, then, I better start driving faster.”
“That girl says I irritate her, but I really like her. I guess I should start being more obnoxious.”
“Oh, dear, the roof is leaking again. I better make the hole bigger.”
About this blog's headline image: In deflation, prices drop, and consumers stop buying in anticipation that prices will be lower in the future. Deflation is rarer than inflation, but when it strikes, it causes destruction all around with falling demand, sluggish investments and widespread unemployment.
Labels: economics/finance, politics
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While I do admit that Obama's press conference and Geithner's that followed were probably one of the most useless press conferences in my lifetime (and yes, that does include Bush), the point you are trying to make is not entirely accurate.
1) The Banks are not going to lend money when they cannot guage the health of their own balance sheets. Furthermore, Mark-to-Market accounting rules have created an additional layer of pressure with their capital restrictions that banks would rather horde the cash in anticipation of further writedowns.
2) The $800+B stimulus, though a good idea in theory is turning out to be a bad idea in practice. Almost half of that money is tax cuts and if Bush taught us anything, it is that giving people who are saddled with debt money and expecting them to spend it is like giving a monkey a gun and NOT expecting it to shoot you. Shame on Obama for not learning from the past mistakes and shame on the republicans for wanting to repeat it again!
3) The TARP Part II or the TALF as its called now (as if the name change alters the uselessness of it) outlined nothing that wasn't different from the same ineffective rhetoric that Paulson fed us with Part I. We heard a lot of the "what" but none of the "how"
So, you can be a liberal democrat and vote for a massive spending bill that will take the government's share in the economy from 20-40% or a conservative republication and vote for a tax cut and less government spending, but, as always, the real solution is probably somewhere in the middle...
Keerti
Best stimulus would be to give this Trillion dollars to individual tax payers either divided equally or according to there tax bracket that would generate a booster shot in the economy. I believe there are eighteen zeros in a trillion if some one could do the math.
Chandru