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House Price Crash Forum

Low Rates May Do Little To Entice Nervous Consumers

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The Federal Reserve’s announcement last week that it intended to keep credit cheap for at least two more years was a clear invitation to Americans: Go out and borrow.

But many economists say it will take more than low interest rates to persuade consumers, a crucial driver of the nation’s economy, to take on more debt.

There are already signs that the recent stock market upheaval, turbulence in Europe and gridlock in Washington over the federal deficit have spooked consumers. On Friday, preliminary data showed that the Thomson Reuters/University of Michigan consumer sentiment index had fallen this month to lower than it was in November 2008, when the country was deep in recession.

Under normal circumstances, the Fed’s announcement might have attracted new home and car buyers and prompted credit card holders to rack up fresh charges. But with unemployment high and those with jobs worried about keeping them, consumers are more concerned about paying off the loans they already have than adding more debt. And by showing its hand for the next two years, the Fed may have inadvertently invited prospective borrowers to put off large purchases.

So the Bernanke hopes to solve the debt problem of the overleveraged by getting people to get deeper into debt and increase their leverage....

Hmmmm.... I think there could be a problem here....


It is well known that excessive leverage was one of the primary causes of the Great Depression. Specifically, many people bought stocks on margin, and when stock prices dropped, they were wiped out and their lenders got hit hard.

Banks also used leverage in the Roaring Twenties, but things have only gotten worse since then.

If only we had a great depression expert in charge at the Fed....

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