Confidence, Credit, Spending & Saving

A reasonable person must be confident of their economic future when considering spending or borrowing money for a purchase or business expansion. Some commentators have opined that banks need to start lending, others have complained about "predatory lending," and others have stated that consumers are now saving too much.

I cannot think of any situation where an investor would undertake a situation that is almost certain to result in failure and loss of capital. This is where the phrase "predatory lending" leads me. Certainly, there may have been loan/mortgage brokers whose financial interests may not have been linked to the ability to repay of the borrower. But a broker would face increasing resistance of loan application acceptance by underwriters if a continuing pattern of malfeasance was evident. A reasonable lender would not make a loan if there was little hope of being repaid. And if the lender's intent was to resell the loan to "holding" institutions, the value of the transaction would be negatively impacted if there was little hope of being repaid. Think about it, would you buy a General Motors bond at the market open this Monday, March 9th, 2009? Blaming the current national economic situation on "predatory lending" is fallacious.

Saving too much. At the height of the boom, economic commentators commented that consumers were spending too much and saving too little. Now, in a period of economic recession, the problem is that consumers are saving too much. There has been little material change in consumer credit levels, so the data does not support that a majority of people are paying off accumulated debt instead of making new purchases. There has been a slight increase in tracked deposits, but I would not conclude that they are great enough to hold responsible for the recession.

As for banks not lending, at most, only anecdotal evidence of this is available. The consumer credit levels reported by the Federal Reserve (linked above) are not plummeting. This would lead me to believe that some people are paying off loans, and others are taking out new loans. Banks cannot survive for long on transaction fees and interest payments on existing loans. They must make new loans to replace those being paid down, or paid off, in order to maintain revenue streams to meet day to day expenses and acquire a reasonable profit.

In my opinion, it is confidence that is to blame for the state of the economy. With an ever increasing level of governmental meddling in the economy, i.e., trying to avoid recessions, the government has, despite its best intentions, made the recession worse than it would be if the government did nothing at all. The business cycle cannot be denied. There are periods of expansion and contraction as excesses are corrected naturally by the market, just as ordinary as the seasonal changes in the weather. The market is comprised of 303 million Americans each making economic decisions which best suit their individual situations. The best thing government can do is try to restore the confidence of the 303 million market participants, not try to manage their decisions for them. Consider the essay "I, Pencil."

Like it or not, taxing the rich does not boost overall confidence. The US has the 2nd highest corporate tax rate in the world according to The Tax Foundation and the National Center for Policy Analysis. Just this statistic alone is a barrier to entry for potential start up businesses. Businesses employ people, who spend money and stimulate the economy. Attacking business, and "the rich" does not instill confidence.

Letting the "Bush Tax cuts" expire will increase taxes on businesses and individuals. Net effect, confidence sapper.

Green house gas regulation/taxation, environmental controls/regulation, Climate change regulation all increase uncertainty, and reduce economic activity. I am involved in an industry which releases carbon into the atmosphere. My concerns regarding the probability of punitive taxation and regulation has increased my uncertainty regarding my industry, and has stalled plans for expansion and hiring. My situation is anecdotal, however I do not believe that I am the only individual in the nation with these concerns.

Well, I'm ranting now. So thanks for reading, more later.