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Bren10000
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"A remaining issue is whether this deleveraging is a result of borrowers being forced to pay down debt as credit standards tightened, or a more voluntary change in saving behavior." This is THE key policy question surrounding the American economy. I am currently writing a research paper on the topic. I would argue that the demand side was the key factor in the early stages of the recession, as well as the lackluster recovery. 1) Growth in monetary aggregates of Base Money, Credit, and M2 historically tightly correlated have completely diverged, indicating money is stuck in the banking system with no willing borrowers. 2) This harks back to Japan's experience when the aggregates behaved similarly, corporate credit falling despite available credit. 3) Continued low interest rates, from the 10 year Treasury to mortgage rates despite increasing federal deficit. Such deficits under normal loan demand conditions would likely crowd out investment 4) Banks should be flush with cash while the explicit government guarantee and stock market run-up indicate credit conditions are improving. 5) Continued economic weakness is highly concentrated in credit bubble regions, indicating consumers debt-overhang. Credit demand is too often an overlooked in recessions. While popular perceptions of the Great Depression focus on the banking panic, surveys in 1932 showed 85% of businesses had either no desire or difficulty in obtaining loans.
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Mar 21, 2011