Today the Federal Reserve lowered the federal funds rate 75 basis points. This allows intra-financial institutions to loan to each other now at 3.5%. Now this might have temporarily stopped the hemorrhage, but does it make sense to increase credit when the real problem is bad debt?
According to Bonddad:
Total household debt outstanding went form about $8 trillion to a little under $14 trillion, or an increase of about 75%. All of that debt has to go somewhere -- it doesn't exist in a financial netherworld. It has to become an asset to somebody. And it has -- in the form of a massive amount of securitizations which are currently being written down by literally every financial name in the business. So far we've seen about $100 billion or writedowns in the financial markets and we are going to see more. That's the central problem right now; it's not interest rates but the amount of crap on the books of various financial players (hell -- all the financial players). In other words, the problem isn't the need too underwrite more consumer debt -- we are already choking on consumer debt. The problem is the system made too many loans that are now going bad. And the only way to wean us off of that problem (easy money) is to feel the pain so we don't do it again.
That's the elephant in the room.
No one is talking about the labor arbitrage of the American middle class, the fact houses are too damn expensive for most Americans to afford and we're drowning in debt simply because we do not have large enough paychecks to pay the bills. Making credit more easily available is simply not going to address this fundamental problem that global labor arbitrage has wrought.