The $54 Trillion Question: Can The Credit Crisis Be Fixed With More Credit?

Easy money and bad decisions tanked our economy, and we're not out of the woods yet. The fix applied so far: more easy money. Will it work, or are we going to create a new asset bubble without solving the problems caused by the last one?

The use of credit has been building in the United States economy over the last 50 or so years. Credit is self-reinforcing on the way up. As credit expands, financial asset prices rise, which creates a wealth effect for all involved. Households, corporations and the government are able to consume at levels not possible previously. However, expanded levels of credit can't last forever unless incomes rise at a comparable pace.

If so much credit is created that it can't be serviced, or eventually paid back, you end up with a bubble, which must burst at some point or, at the very least, a long de-leveraging process results. Just ask Japan. So do we have too much credit in the U.S.? Read More