Thursday, May 14, 2009

What if Nobody's Borrowing?

Interest rates are at an all time low. Banks have been given billions by the government. Retailers in almost all industries are offering incredible deals. Community and regional banks are in relatively good shape, as compared with the Bank of America's and GMAC's of the world. And yet, it appears consumer and business loan applications are down this year. Why?

One of the more under-reported stories of this economy is that it doesn't much matter what the federal government does. If people don't want loans, they don't want loans. This was discussed in an article today in the Wall Street Journal. It was noteworthy because I haven't seen more articles like this over the past few months.

If people don't perceive a self interest and potential future gain from borrowing to invest, there is little government policymakers can do about it. On the consumer loan side, this also indicates that people are more rational than academic theorists give them credit for. People don't have to be perfectly rational. All but the most destructive people act in a somewhat rational, predictable way. People are saving rather than borrowing. This makes a lot of sense at this time.

It also indicates, better than opinion polls could, what people are really thinking about the current and likely future state of affairs. The country is not optimistic about future prospects. We are mainly looking to shore up basic necessities and pay down debt. When people are optimistic they tend to invest or buy new cars or whatever. We're not doing that. I am certainly not doing that. This is a time to get out of debt and shore up basic necessities. So if you have credit card debt or a house. Pay it off as soon as you can because you may be laid off next...

Keynesian economic policies and trillions and trillions of dollars of debt that amount to many tens of thousands of dollars that you and I will have to pay back, do not come without consequences. A president making daily proclamations of radical changes in healthcare, energy, executive pay, international trade, and financial market regulations among other things -- in the midst of this environment -- do not inspire confidence for those who are sane.

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