Econ For $100, Alex

from the NY Times: Bailout Monitor Sees Lack of a Coherent Plan


“You can’t just say, ‘Credit isn’t moving through the system,’ ” she said in her first public comments since being named to the panel. “You have to ask why.”

If the answer is that banks do not have money to lend, it would make sense to push capital into their hands, as the Treasury has been doing over the last two months, she continued. But if the answer is that their potential borrowers are getting less creditworthy with each passing day, “pouring money into banks isn’t going to fix that problem,” she said.
...
In her view, the government should be trying to create more reliable customers for those banks by shoring up the fragile finances of the millions of American families that could not save, borrow or spend even if their banks were flush with capital.

“Any effective policy has to start with the households,” she said. “Years of flat wages, low savings and high debt have left America’s households extremely vulnerable.”


There doesn't seem to be an economic question to which the answer, in the minds of congress, isn't “an extremely large stimulus package”.

In this case, I am largely sympathetic to her general concern regarding the financial well-being of american families. I am less sympathetic to its application here.

To read the Times, her argument can be fairly summed up as: "American households bear too much debt relative to their wages and savings, therefore we need to 'shore up' their finances so that they can borrow more." If they did actually borrow more, they'd, of course, be back to bearing too much debt relative to their wages and savings and we'd be back to where we started except deeper in public debt.

By any sort of historical measure, American households, business and governments are still in much too much debt. Its easy to argue that whatever immediate cause, this drunk-on-debt-edness is the broader cause of our current, now official, recession. Only in Washington and on Wall Street does it appear to make sense to frame the problem as "There is not enough credit in the system".

Final Thought: The increasingly easy availability of credit depresses wages. If I can -- with the help of credit -- consume more without earning more, I will be more willing to work for less.