Friday, February 06, 2009

Hair of the Accountant

You and your buddies went out on Friday night. You hit the rack at about 3:30 am on Saturday. You wake up at 11:00 am your head is pounding and your gut topsy-turvy. What do you do? You stumble to the refrigerator pull out a cold one, crack it open and pound it down and proceed with another cold one. You manage to hold them down and you start to feel better so you carry on. That technique for dealing with hangovers is popularly known as "hair of the dog that bit you". I am quite sure all sorts of health professionals and alcohol abuse counselors have nothing good to say about that.

However, we as a nation are engaging in a similar coping strategy. Yeap, with the credit crisis and the housing bubble.

We are being told there is precious little credit to go around anymore. However, we are also being told there is not enough spending going on consumers are starting to hoard cash instead and pay off debt instead of buying the latest TVs, clothes, etc.

So what is the national response? To cheapen credit and encourage people to resume spending. All that is going to do is to make credit harder to come by. In order to encourage the increase in credit we need to make it more expensive, at the same time this will reduce the demand for credit. Guess what? Making credit more pricey will cause people to save more.

Now, don't get me wrong, I don't think we should all turn into a nation of misers, but our current problems are related to extravagance not miserliness.

Should the government stepped in back in 2001 & 2002 to boost tech spending? No.

So, let us roll over moan about last night, swear to never over-extend our credit again and the let time cure the hangover.