Tuesday, March 03, 2009

What is bad about paying down debt?

I have continually heard or read things like the following in recent months:
Rosenberg is one of a chorus of economists who fret that tax cuts in any stimulus bill will prompt most Americans to stash the money away or pay down their debts--$2.6 trillion on autos and credit cards, $10.5 trillion on home mortgages--rather than spend their way out of the recession.
That was from Forbes.

Economists act like paying down debt is the worst possible thing to do right now. However what does paying down debt do? It gives money back to the banks so they have more cash on hand. And giving money to the banks is something we are doing at rates unseen before. Looked at that way, a tax cut could bail out both the banks and the Tax Payers at the same time. Consumers repay their credit card debt, HELOCs, etc. and banks will have more money to make new loans. Banks could then make loans to companies trying to bridge financing of profitable projects, to home buyers looking to take advantage of fallen housing prices, etc. It seems like a better solution than giving money to banks so they can sit on it and not lend it out anyway.

As a Tax payer I'd be happy to take what is left of AIG and give it to Warren Buffet's Berkshire Hathaway. That is if he would take it. Perhaps even if we could pay him to take it.
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