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The maasive increase in aggregate demand is only happening because companies don't have the confidence or the credit to invest, and are instead cutting back on costs - which means trimming workforces, which in turn means that employees are paying down debts and saving rather than spending.

None of this is inevitable. Loosening lending will go a long way towards fixing it, and since private banks would rather waste cash on end-of-the-world bonus payments than lend it sensibly, government intervention is the only rational option.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 12:50:20 PM EST
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increase decrease
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 12:50:53 PM EST
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That's how it started -- lack of counterparty confidence to lend, which is why Tarp was a good idea at the time.  But we're way beyond that now. Personal savings has skyrocketed everywhere, which means that individuals all over the world are in fear of losing their jobs, and many of them will, so they rationally reduce spending.  Same for businesses of all kinds except repo men. Fixing banks won't help until people can be assured of income stability.  

Looseninig lending would go a long way toward helping that, but it is not a sufficient, or even necessary, condition any longer.  Also, except for economists, political authorities of all stripes are calling for more conservative lending, as well as most people commenting here.  That means high capital ratios like we have now, and high lending criteria even under government management.  Only a re-establishment of markets for money and credit through increasing confidence in future income streams can solve the crisis at this late stage.

by santiago on Thu Jan 22nd, 2009 at 02:28:27 PM EST
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The systemic problem is that markets are inherently manic depressive and incapable of rationally assessing future risk.

During boom times of irrational exuberance bad companies are funded because risk is underestimated.

During recessions of irrational pessimism and paranoia, good companies aren't funded because risk is overestimated.

Neither is optimal.

These boom/bust cycles are a kind of social illness - an economic plague which reappears cyclically.

Rather than trying to recreate traditional forms of banking, which at best are only barely stable and are likely to react to the present situation by being excessively conservative, what's needed is a distributed organic economy in which credit isn't monopolised and parasitic speculation is illegal.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu Jan 22nd, 2009 at 06:32:26 PM EST
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