December 17, 2008

So the United States Treasury has bitten the bullet and slashed the interest rate, not by half as most expected, but all the way down to 0.25%. For all intents and purposes, any lower and the Treasury would be paying money to the banks for them to borrow money ... and with the bank bailout having been pre-approved, that is not as bizarre a notion as it once might have been.

Those banks which were not in desperate shape before, were it obvious or occult, can now consider themselves in pretty good shape. After all, their level of risk is already fixed, and now they know that there is a federal bailout in place to cover future waves of foreclosures.

What they don't have is any incentive whatsoever to take on additional risk. At this point and this level, the prime rate between banks matters no longer at all. The only thing that matters is the willingness of lending institutions to take on new credit risks at any interest rate. To say that there is almost no trust here is to say that there is almost no water in the Gobi desert. No wonder the cuts in the prime are not being translated down to consumer levels.

Our modern economy absolutely relies on fluid credit for continued flow and continued solvency at every level, from the highest to the lowest. No matter how liquid our finances, no matter how solid our credit history: we have suddenly all become high risk. Until that perception changes, there is no reason for banks to significantly lower their consumer lending rates.

Given high job losses and threat of job losses, given high interest rates, the natural consumer response is not to borrow if at all possible ... and then watch the retail economy collapse! and the jobs it supported, vanish!

But the low Treasury rate is already having another effect. Investment is draining away from the United States, seeking more lucrative markets: and the USD is collapsing along with them. The lower dollar would be highly useful to export industry, but the level of the trade deficit should indicate just how much basic level manufacture had been outsourced during the globalisation decade. It might have been useful to the automotive industry, had American models ever managed to penetrate foreign markets. It is popular to blame tariffs for this, but tariffs have nothing to do with image. After all, European models managed it just fine, and they were faced with exactly the same tariffs.

The United States can't do anything short-term about the level of foreign debt except pay it down, and with the low USD it will now cost even more to pay it down. The United States can't do anything about its trade deficit until and unless its citizens learn how to live within their own oil self-sufficiency. Barack Obama's promises notwithstanding, it can't do anything short-term about disengaging itself from the Iraq war, with all that is involved there. Even if complete will existed from this point in time onward, it would take at least six months to a year just to set up the structures needed to disengage. As one example, far from the hardest: how much cargo room do you think it would take for 150,000 troops and their personal gear to be transported halfway across the world? How many airplanes and safe runways are available?

What the federal government can do is to step more deeply into the lending and saving business, not by buying out or bailing out other banks, but by offering these services directly to the consumer at the rates the banks are refusing to give.

What it cannot do is to educate its citizens. For a very long time now, we have lived in the assumption that credit was a natural extension of our income. Now that bill has come due -- during the holidays, when else? -- and dealing with that bottom line is temporarily strangling our ability to do anything but deal with it. Once we get past the crunch point, however: will we remember that a bill is going to come due?

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