25 November 2008

More Credit to Fix the Credit Problem: How is this logical?

How does making more credit available to consumers for acquiring cars, new gadgets, and new housing fix the inherent problem in the USian economy? Wasn't it the over-availability of credit, without matching REAL dollars, the cause of the current economic breakdown?

The U.S. Federal Reserve and Treasury Department pledged $800 billion US to help boost the flow of lending for mortgages, students, cars, credit cards and small businesses...

Key markets for consumer debt such as credit cards, auto loans and student loans essentially came to a halt in October, said Treasury Secretary Henry Paulson at a news conference announcing the new measures.

"This lack of affordable consumer credit undermines consumer spending [and] as a result weakens our economy," said Paulson.

But it was my understanding that people over-extending themselves was a huge part of the problem. How does MORE credit help?! It doesn't matter that the credit may come at lower rates. It still means acquiring more debt.

Tuesday's action is the latest effort by the government to dissolve a hardening credit clog that has badly hurt the economy... A survey released Nov. 3 by the Federal Reserve found that 60 per cent of banks that responded said they had tightened lending standards on credit card debt.

But isn't this a good thing? For those who favour free markets, isn't this simply a much-needed market correction?

I simply don't understand how making more credit available will fix the inherent problem in the system. To me, this will only make the situation worse, not necessarily in the short term but down the road.

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