People are starting to realize that it's not an a bank credit freeze that has halted the economy. It's consumer spending, stupid:
Despair over the economy sent Wall Street plunging again Wednesday, propelling the Dow Jones industrials down 733 points to their second-largest point loss ever. Stocks fell on a combination of disheartening economic data, including a big drop in retail sales and a Federal Reserve report that said tight credit conditions are hurting businesses across the country.
The government's report that retail sales plunged in September by 1.2 percent -- almost double the 0.7 percent drop analysts expected -- made it clear that consumers are reluctant to spend amid a shaky economy and a punishing stock market.
The Commerce Department report was sobering because consumer spending accounts for more than two-thirds of U.S. economic activity. The reading came as Wall Street was refocusing its attention on the faltering economy following stepped up government efforts to revive the stagnant credit markets.
How are consumers going to spend money when they can't get home-equity loans to pay off credit cards?
People are forgetting that it isn't responsible people who drive consumer spending. The people who purchase $5,000 televisions tend to be the same folks who put it on a credit card. After all, most anyone who actually saved up for a $5,000 television would realize, "Gee, this money took me a long time to save. It seems pretty stupid to go out and buy a television." But people who say "Charge it!" think differently. If you have the credit, you may as well use it.
I suppose Paulson et al. can start giving consumers low-interest credit cards. That would actually get the economy moving, since people would start spending money.
But then what? What's the exit strategy? You can't life off of credit cards forever.
Maybe give everyone consumer credit - enough to stimulate the economy, but not enough to lead to excessive inflation. Extend this credit until home values increase. Then call in the credit, thus de facto forcing everyone take out a home-equity loan? And then home that home values don't rapidly decrease?
Is anyone starting to realize why centrally-planned economies don't work? You couldn't plan an economy, and neither could I. No one has the brain power.
Incidentally, it now seems like a bad policy to to give people tax breaks for home-equity loans. In the short term, it drove consumer spending since people used said loans to pay off consumer debt. In the long term.... Well, we'll need to wait and see.