Overcapacity of production is one of the main phenomenon of recession. One of the key determinants is wages. On individual level, corporations has the incentive to cut wages and layoff workers to survive in competitive market. On aggregate level, wages are the largest social purchasing demand for industrial production. When consumption is down, the whole economy will slow down and more jobs will be lost. Over the last twenty decades, wages has been trending slowly downward comparing to the total output produced. In order to keep consumption level high, government and financial institutions introduced credit-led consumptions such as consumer loans, credit card, mortgage loans and other various types of credit and loans. The overall effects are that consumers can consume products or services first before saving enough money to purchase it. This simultaneous process of credit expansion on consumption is blew up first in sub-prime mortgage securities and now spread to all other credit-led consumption loans and securities.
The result of this credit-led consumption is that individuals, states and government are loaded with debt after decades of build-up of debts. Debts are not only the obligations for entities to pay at the debt mature date. Debt is also the future steams of income that has to be assigned to pay back for the current consumption. That means that most consumers, state and government has been spending the incomes which they might generate in the future to cover current level of consumption. We are mortgaging our future into current spending.
Suppose that government force banks and other financial institutions to continue to support the credit expansion directed at increasing consumption while wages continue to keep at suppressed level, wages earners still won't be able to pay back their loans with expected interest payment with the constraint of their limited income. Over time, creditors will lose confidence in borrowers' ability to pay back both interest and principle and they will cut the credit line eventually. If the government doesn't step in to provide credit to consumers or direct banks to do so, the consumers and wage earners will pull back their consumption and full blowup economic recession is going to take a long time to recover while consumers are saving their money to spend.
Overall, there is no short-term solution for the dilemma of whether to extend consumer credit. The root problem is income disparity which the politicians are reluctant to touch upon.
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7 years ago