The Federal Reserve’s new proposal to help “unstick” stuck credit markets sounds a bit dubious.
Nov. 26 (Bloomberg) — The Federal Reserve’s new $800 billion effort to combat the financial crisis is designed to make credit more accessible to shaken consumers who aren’t sure they want more debt.
Households and lenders may not respond much because of the wealth destruction from plunging property and stock values, and the deepening economic slump, economists say. That means banks may end up returning the Fed’s new liquidity through deposits at the central bank.
The idea that things can get back on track and prevent a recession, or at least mitigate its effects by enticing reluctant consumers into taking on new debt when they already have a considerable amount strikes me as wishful thinking. The problem is that many consumers see a recession is coming if not already here. They figure the chances of losing their job has gone up. So now is the time to reduce spending, reduce debt if possible and certainly not taking on more debt.
