Fed Launches Program to Create 1 Trillion in New Debt

The government can’t stop promoting more debt as part of the solution to the financial crisis. If people didn’t have consumer debt, however, the crisis wouldn’t be a crisis.

In this AP story, Fed launches new $200B consumer credit program, the article claims it’s hard to find lenders these days:

Under the program, the Fed will buy securities backed by different types of debt, including credit card, auto, student and small business loans. The credit crunch — the worst since the 1930s — has made it much harder for people to obtain such financing, and those that do can be socked with high rates.

It’s probably easier to borrow money in those ways than any time from the end of World War II to 1980. It’s harder than it was during the last decade to obtain such financing but not hard by historical standards. Yet the Federal Reserve is lending $200B to investors who are willing to put their own money along with this TALF money into securities backed by consumer debt. The goal is one trillion dollars of new debt.

This is a tough problem because economic theory says it’s good to go into debt during a recession. It evens out the economic cycle by putting unused production capacity to work. Without such stimulus, some of the means of production lie dormant and therefore waste time and resources that could be used to produce stuff.

There is a much bigger issue, however, than the economic cycle. Our entire economy is structured in such a way that fluctuations in asset prices or a slight decline in GDP is a near catastrophe.

I am taking the radical position that restructuring our society to handle economic fluctuations is more important than stabilizing the economic cycle. I am willing to accept some lost production and other market inefficiencies if it’s part of the plan to prevent the next economic cycle from being a crisis.