now that the recession of 2008 is in full swing, i figured this would be a good time to add my "two cents". as many of you already know, the US congress approved a $700 B bailout bill, which was signed into law by president bush. notwithstanding that fact, the US (and global) economy continues to decline. what happened? the US home mortgage crisis led to a freezing of the credit markets. lenders became very reluctant to make new loans because they feared that they won't be repaid. but why is that a problem? this is a very big problem because many businesses need credit to maintain their day-to-day operational expenses -- these businesses cannot continue as a going concern without it. so, what about it? such businesses that have employees may not be able to make payroll without credit. this leads to layoffs, which then leads to delinquent mortgage payments, which then leads to home foreclosures, and the vicious cycle continues until all of the money supply is drained out of the economy and financial depression ensues. now what?
the solution is to place a block in front of the vicious cycle that's big enough to grind it to a halt. essentially, it would need to be more than enough to stanch the bleeding. in other words, something would need to happen to keep the money supply flowing. that something is more money. there would need to be enough money in the market place to prevent the problem from growing. lenders would need to become more confident that any new loans they make would be repaid. but this would only happen if they could write off the bad loans they have on the books. this can only happen if they get a large enough infusion of cash to cushion themselves against future losses.
based on the way things look right now, $700 B isn't nearly enough to prevent a global depression.
Labels: economy
