The AP noted today that With credit tight, Fed extends consumer loan plan:

With banks limiting the availability of auto, student and other consumer loans, the Federal Reserve said Monday it would extend a program intended to help spur more lending at low rates. The program is set up to provide up to $1 trillion in low-cost financing to investors to buy securities backed by consumer and commercial loans. But private economists said the program, Term Asset-Backed Securities Loan Facility, or TALF, has so far provided little benefit for consumers and businesses still struggling to get credit. The program, originally set to expire at the end of the year, has two parts. The part aimed at boosting consumer and business lending is being extended through March. The part geared toward boosting new commercial real estate lending will run through June, because of the extra time typically needed to complete such deals. Delinquency rates on such loans have soared as companies have downsized or closed their doors, the Fed has said. TALF was created in March, part of the efforts by the Fed and the Obama administration to ease credit, stabilize the financial system and fight the recession. Under the program, the Fed allows for low-rate financing for investors to buy securities backed by credit card debt, auto loans, student loans and loans to small businesses. The market for such loans essentially froze up last fall with the eruption of the worst financial crisis since the Great Depression. The program has the potential to generate up to $1 trillion in lending, according to the government. But participation has been scant: As of Aug. 12, the value of loans outstanding stood at just $29.6 billion.

To get an idea of how successful the Fed’s program to bring back consumer lending has been, please consider the latest update on consumer credit:

In June 2009 total consumer credit volume dropped to $2.48 trillion. It fell by $17.2 billion (0.7%) from May 2009 and a total of $110.5 billion (4.3%) since its peak in December 2008; an ongoing corollary of deflation, overall contraction, and ending consumerism.

It is important to understand what is so misguided about these ideas. We hear it again and again, how the Fed will continue to push for more credit, borrowing, lending, consumption, etc. Rarely ever do we hear the question asked “Do people want any more debt?”. The simple answer: No. People are sick and tired of debt. The Fed can try as much as it wants, it won’t be able to force lending. When people have had enough they have had enough.

Since this causality is not intuitive for everyone to understand, Robert Prechter came up with a neat example that explains the concept a little better, I already posted it before:

Jaguar Inflation I am tired of hearing people insist that the Fed can expand credit all it wants. Sometimes an analogy clarifies a subject so let’s try one. [smartads]It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing Jaguar automobiles and providing them to as many people as possible. To facilitate that goal, it begins operating Jaguar plants all over the country, subsidizing it with tax money. To everyone’s delight , it offers these luxury cars for sale at 50 percent off the old price. People flock to the showrooms and buy. Later, sales slow down, so the government cuts the price in half again. More people rush in and buy. Sales again slow, so it lowers the price to $900 each. People return to the stores and buy two or three, or half a dozen. Why not? Look how cheap they are! Buyers give Jaguars to their kids and park an extra one on the lawn. Finally, the country is awash in Jaguars. Alas, sales slow again, and the government panics. It must move more Jaguars, or, according to its theory – ironically now made fact – the economy will recede. People are working three days a week just to pay their taxes so the government can keep producing more Jaguars. If Jaguars stop moving the economy will stop. So the government begins giving Jaguars away. A few more cars move out of the showrooms, but then it ends. Nobody wants any more Jaguars. They don’t care if they’re free. They can’t find a use for them. Production of Jaguars ceases. It takes years to work through the overhanging supply of Jaguars. Tax collections collapse, the factories close, and unemployment soars. The economy is wrecked. People can’t afford to buy gasoline , so many of the Jaguars rust away to worthlessness. The number of Jaguars – at best – returns to the level it was before the program began. The same thing can happen with credit.

It may sound crazy, but suppose the government were to decide that the health of the nation depends upon producing credit and providing it to as many people as possible. To facilitate that goal, it begins operating credit production plants all over the country, called Federal Reserve Banks. To everyone’s delight , the banks offer the credit for sale at below market rates. People flock to the banks and buy. Later, sales slow down, so the banks cut the price again. More people rush in and buy. Sales again slow, so it lowers the price to 1 percent. People return to the banks and buy even more credit. Why not? Look how cheap it is! Borrowers use credit to buy houses, boats and an extra Jaguar to park out on the lawn. Finally, the country is awash in credit. Alas, sales slow again, and the banks panic. They must move more credit, or, according to its theory – ironically now made fact – the economy will recede. People are working three days a week just to pay the interest on their debt so the banks can keep offering more credit. If credit stops moving the economy will stop. So they start giving credit away at zero percent interest. A few more loans move through the tellers’ windows, but then it ends. Nobody wants any more credit. They don’t care if they’re free. They can’t find a use for it. Production of credit ceases. It takes years to work through the overhanging supply of credit. Interest payments collapse, banks close, and unemployment soars. The economy is wrecked. People can’t afford to pay interest on their debts , so many bonds deteriorate away to worthlessness. The value of credit – at best – returns to the level it was before the program began.

This is exactly the situation we have in the US. People took on way more credit than they could ever pay off. They have over borrowed, over spent, over consumed. The contraction we see now is the deflationary payback for years of unprecedented profligacy. When people have had enough of something, they’ve had enough. Jaguars? Anyone?

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