Mrcauser’s Weblog

Just another weblog

Broke dicks can’t borrow….

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How much are you going to lend people who can’t pay you back? Why would banks be any different. Well if the government guarantees the loss they will.

But of course that’s pretty much of what happened over the last decade or so. That plan didn’t work too well, did it?

Maybe I’m right and stimulating demand with tax gimmicks, loan guarantees, make work programs, union guarantees etc. only works if the economy is growing. This “supply side” worked for over a quarter of a century but now we are in new territory: Depression.

Now we need “demand side supply.”

Send me and you a big check and we’ll spend and borrow to the max and improve our FICO scores until your eyes bulge. Should be good for another 5 or 10  years or so until we can import enough Mexicans  to pay my Social Security checks, LOL.

Got a better idea?

Why aren’t we using monetary policy to stimulate aggregate demand? | Credit Writedowns

The reason credit is tight in the US at present is because the banks are being very cautious and they do not perceive a strong demand coming from credit worthy customers. Once they assess that there are worthy borrowers they will lend regardless of the central bank expansion of reserves. Additionally, borrowers have minimal capacity or ability to borrow, due to declining incomes which precludes the ability to service existing loans. Credit, as James Galbraith reminds us, is a two-way contract between borrower and lender, not a one-way “credit flow” from banks to borrowers, which can be solved by “unblocking credit” via bank bailouts.

One other point which is seldom made on the virtues of fiscal policy: it actually enhances financial stability. A fiscal policy deployed properly toward generating full employment (say, via a Job Guarantee scheme) means you have growing incomes and, hence, a great ability on the part of the borrower to service his/her existing debts. Debt which is successfully serviced means reduced write-offs for banks and, hence, less impaired balance sheets. In other words, fiscal policy starts the process of financial reform from the bottom-up, rather than top-down. The sooner President Obama and others figure this out, the better will be the outlook for the US economy. But don’t hold your breath. We still seem far away from that.

Written by mrcauser

September 19, 2010 at 7:21 pm

Posted in Uncategorized

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