Fed Pledges Top $7.4 Trillion to Ease Frozen Credit
bloomberg.com
bloomberg.com
What people keep forgetting is that the problem isn't what we're seeing now. The problem is NOT that consumers aren't spending 'enough' money, or that banks aren't making 'enough' loans, or that people aren't buying 'enough' houses.
The problem was that (induced by a loose monetary policy) consumers were spending too much relative to their incomes, banks were making loans to wealth-destroying ventures, and developers were building condos that no one needed.
The symptoms we are observing now are part of the correction. The government is attempting to move us back into the situation that caused the problem in the first place.
I guess the easiest way to explain this is by looking at how people invest their time. We would be better of if the nation invested time in becoming a better worker, learned a skill, fixed things than if the the nation spent that time watching tv, drinking, or destroying things (war).We have spent our money on houses that are bigger than we need, cars that are bigger and less fuel efficient than we need rather than plants that we need, investment in companies building new products, even arguably infrastructure.
And the US cannot bail out the Federal Reserve. The United States borrows from the Federal Reserve and pays the Federal Reserve interest on that money. In other words, the US gets its money from the Fed.
A bailout of the Fed would require the US to borrow money from the Fed, who doesn't actually have any money because they need a bailout.
That 7.4 trillion, divided by 300 million people(babies included), would mean that every person in the country would get $24,666, so an average family would get $100K to spend.
Don't tell me, that wouldn't stimulate spending.
Instead they give it to banks, who will just use that money to buy some other banks, while they are cheap
First they will try to borrow all that money, when that doesn't work they will start printing money, that still won't work but it will have the added "benefit" of destroying savings thanks to hyper inflation.
Edit: There has been no year of >2% GDP decline since the end of WWII. The Great Depression saw an annual drop in GDP of 13.0% in real dollars.
Just to let you know what we're risking 50% of GDP for (some portion of which will actually be spent).
PS: That may or may not be a joke I can't tell.
Credit is "frozen" now b/c banks won't lend, in some cases not even to each other, over fears that the borrowing institution is not going to be able to pay back the loan.
So the $7.4 trillion posted by the government is more about restoring confidence than anything else.
There are some good papers on the subject by Stephen Figlewski at http://pages.stern.nyu.edu/~sfiglews/FinCrisis.htm particularly the one titled "Viewing the Financial Crisis from 20,000 Feet Up".
That was the assumption behind the last stimulus plan, too, but it turns out only 10% to 20% of it was actually spent (http://online.wsj.com/public/resources/documents/WSJ-2008Sti...)
Even if people did spend the $10k you'd like to give them, it wouldn't make a dent in terms of home or auto sales unless there was financing available, too.
"Low wealth households households that reported not having at least two months in savings in case of an emergency also raised their spending more than the average household when the rebate arrived."
"Our findings underscore the potency of the economic stimulus payments in stabilizing consumer spending during recessions."
This would suggest a trickle up vs trickle down economy where a stimulus package targeted at poor people would have the greatest impact.
PS: Poor people spend more of their money than rich people film at 11.
Yeah, duh, but even if you gave poor people $20,000 and they spend it all, how does it do anything about the housing crisis?
Without lending, that $20,000 won't change the market at all.
Granted, the only thing that will fix anything is time. The $7.4G is a handout for bonuses and capital for the well-connected to position themselves for the next bubble (snatch up all assets while they are undervalued). Increasing the debt only hurts the economy as a whole.
And yeah, crippling debt is normally a bad thing, but you have to remember that we are making up economics we go along. As long as economists keep saying that crippling debt is ok, everything functions. As soon as the theory changes, then we're all screwed.
So it is a balance between inflation & deflation. Clearly the fed sees deflation as a bigger issue right now - the fed can fight inflation, negative interest rates that plagued japan for a decade are much harder for a central bank to fix. They've cut short term lending rates as much as they can, effectively wiping out interest rates. Personally, I don't know if they're lending too much or too little, and I'm sure Congress doesn't either, so I'm not convinced regulation (and the attendant political pressure) would be a net gain.
Print more currency, make it easy to borrow which results in people borrowing to buy overpriced things(due to inflation as money supply increases) which sooner or later results in Bubble. When the bubble bursts, people lose their jobs and the value of overpriced things comes back to normal and people end up with Debts. We are in the phase where people are in debt and are losing jobs every quarter, by giving them more money or to the corporations which fired them, it does not make sense at all. In Simple words, It was a Bubble, it Burst. It really does not make sense when someone is infusing more money in the markets assuming prices of houses will go back like they were during Bubble or corporations will hire people assuming 40 or 50% growth every quarter, It's time to wake up now and think rationally. If growth is not organic, its not growth at all, It's Bubble.