What Happens To American Consumer Credit After Government Stimulus?

What exactly happens to American consumer credit after a government stimulus is speculative until it actually happens, but there are a number of theories on the matter. These theories range from the cautiously hopeful, to downright scary and pessimistic.

The Right Package for the Right Economy

Positive results stem from applying the right stimulus package to the current economy. For example, the economic crisis in 2001 was a result of many lending agencies not having the money to lend out, which took away from money that many households were expecting to have. The stimulus package that worked for them would not work as effectively in 2008, where the economic crisis is due in large part to the lenders’ fear of risk in loaning money. This fear comes from what has been called a “fixed-income crisis.” People either can’t afford a new loan because their fixed income never increases, or they spend more than their fixed income will allow.
Therefore, the proper stimulus package should be designed to put more money into the hands of the low to middle income classes who are suffering from the problems of a fixed income.

Will It Work?

Looking on the bright side, some theorize that by increasing low to mid level fixed incomes, home owners will increase their spending, which will in turn boost the spending that company’s do and raise the economy. However, others point out the fact that the recent government stimulus package put together in 2008 is a temporary measure, and as such, will leave the economy even worse off than before. Without long term tax cuts and benefits, households will begin to spend more, only to suddenly find they don’t have the money to keep spending. Corporate banking will cause these households to slip further into debt.

Concerns If It Does Work

Some have cited that an economic stimulus package that works may only lead to further problems. The idea behind a stimulus package is to provide breaks to increase private spending, especially spending from corporations. However, if the economy were to begin to rise despite any stimulus package, then the rising commodity prices could combine with the stimulus package and end up increasing inflation.

Additional Benefits to Add in the Future

In order for the government economic stimulus to work, long-term measures need to be taken. For example, a stimulus package could be put together that not only provides major breaks now, but gradually declining breaks over time, the idea being to “wean” people and companies off of government breaks until a more self-sustaining economy can be established. Additionally, to curb problems that may occur as the stimulus package dwindles down, credit counseling should be offered by the government, or at least organized in a manner to make credit counseling easily attainable by consumers.

There are a number of theories and ideas about where the economy and American consumer credit will go after a government stimulus. Unfortunately, we will never know if a stimulus will work until it happens.

 

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