Promoting consumer debt in the US: Should we?

I have to admit that I am confused. The US wants to pump a bunch of money into the economy in order to get consumers borrowing again – why?

I thought that one of the primary issues was that the US consumer has borrowed too much in the past, supposedly to make up for a “glut in savings”. This had to give way at some point surely.

Of course the Fed and the US Treasury should be looking at loosening credit constraints that have appeared – but are they there. Megan McArdle was able to get hold of a good number of credit cards, and as I noted there seems to be some “throwing of funds” at consumers in LA at least.

Now, businesses over there (and potentially here) are suffering from credit constraints – so why doesn’t the Fed and Treasury work on loosening the constraint on business borrowing, instead of trying to knock down mortgage rates. Businesses that haven’t shut down don’t lay off all their staff!

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  • Indeed. Listening to Ben Bernanke on the radio t’other day I was surprised that he seemed to be advocating credit for day-to-day living.

    It’s been a recurring theme in economics over the last decade (plus some more) that US consumers have been over-extended. Just how are they to learn the need to be somewhat more prudent if not by having credit come back to bite them in the bum?

    We suffer from a little of the same over indulgence but given that consumer credit conditions have just tightened in NZ (ANZ upping the deposit required for a new home loan) I feel that we are on the better track.

    Of course all the bleatings from various quarters seem to have pushed the political parties (and both the last and current Governments) into throwing money at the problem. I hope this isn’t being seen by Joe Public as an attempt to offset the downturn.

    Maybe we have become too developed and think cycles are only how you describe a washing machine program.

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  • Hi Dismal,

    I don’t know why the hell this happens – someone needs to tell people that they need to live within their lifetime income.

    I think that US policy is a lot slacker than our policy – I think the reason NZer’s have borrowed more is because we expect to eventually grow to have the same living standards as other 1st world countries.

    This may not be a fair assumption by us though 🙁