Isn't the Problem Bad Debt?

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.

Elephant in the Room

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.



Not a debt crisis

This isn't a debt crisis, any more than the Great Depression was when the stock market, pumped by buys on margin of up to 96% of a stock's value was.

They are both crises of maldistribution of wealth. This time the tax laws were fiddled and wages depressed and finally decent jobs were offshored, the result being wealth concentrated into very few hands at the top while everyone else was encouraged to use relaxed credit rules to compensate for depressed wages. The only thing that didn't happen the last time was the offshoring.

No economy with wealth concentrated at the top while the bottom drowns in debt is a stable one and it is going to collapse, no matter how many bad checks the government sends the suckers. Eventually somebody notices the debt is simply uncollectable and the whole house of cards comes tumbling down.

Don't expect this one to be as easy to fix as the last one was. Roosevelt was able to borrow and spend his way out of that one. President Stupid has slammed that door shut.

People aren't patient

The problem comes because of the lack of patience. So many people get a new job with better salary and immediately go on to buy a house... I already saw how two friends of mine fell into the same trap. Unless you have some serious savings, getting a mortgage is just an immense risk considering that you have absolutely no guarantee that you'll have the same income in the next 30 years. Bankruptcies are a huge problem. Too many people go for bankruptcy protection and the lenders take the hit. Few people even want to bother with services like because they have absolutely no interest in regaining a good credit score. It's just so much easier to forget about a huge portion of your debt and call it a day. I honestly don't see the US coming out of this one in one piece. I'm only wondering which nation will have interest in buying us.