As if you didn't already have enough to worry about,

let me share some thoughts I had yesterday. Thinking about how Obama could use the good will, faith, and hope of the American people to help us out of this economic down turn, I really couldn't think of much.

It has to do with our being a service economy. Aside from car manufacturing and home building we don't really manufacture much, and we've come to accept that both those industries rely on consumer credit being avalable. Credit is not available, and I don't think recent experience indicates that the government can make credit available through the banking system.

I think the banks are still in serious trouble. After the mortgage melt down, I've suggesed there would be a consumer credit melt down; credit cards, auto loans, student loans all would be going into default. This is apparently happening. And, just as the banks quit making mortgage loans last year, now they'e trying not to make consumer loans, scaling back credit limits and requiring higher payments on open balances.

I've said the last shoe to drop will be commercial credit: corporate borrowing. Well, thats going to be occurring soon. Retailers will be closing down quickly now, and the money borrowed to buld all those malls won't be being paid back. Retail staffs will join the building trades and auto manufacturers and suppliers in the unemployment lines, and restaurant personnell won't be far behind. Demand for consumer goods will continue to shrink, and people won't have money to require much by way of financial services.

Traditionally, declines in the cost of labor and materials during a recession led to lower prices which gradually led to an increase in demand, and a resumption of economic activity. Without credit availability I don't see how demand can be generated, and even a small resurgence in the demand for consumer products will benefit marginally the low cost producers abroad and not the American economy.

Oooops, the pizza's here. Time to eat. Suggestions welcome on the economy thing.


PS After dinner note. I didn't mention state and local governments defaulting on debts and filing bankruptcies. Some of that will happen and be another blow to financial institutions, especially pension funds and insurance companies. Presumably the federal government will step in to enable local governments to continue to provide services (and jobs) during the bad times to come.

At dinner, Janett and I discussed the possibility of New Deal type programs, like a federal loan agency, by-passing or at least threatening to by-pass, the recalcitrant banks. When last week Bank of America and Citibank got back in the dole line, people began to realize that bail out's are an ongoing process not a one time thing. Perhaps there will be popular support for stopping the bail outs, allowing the banks to fold and finding an alternative credit mechanism. The republican minority would try to portray such a gambit as another indication of Obama's socialist tendencies - the first being his anticipated efforts at health care reform. It'll probably have to get much worse before he's ready initiate such a plan. But, hey, it's much worse already. Folks just don't know it yet.
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