Economy: The good, the bad and the ugly.

The good
This week, the US government passed a bailout package that will buy up to US$700 billion ($1 trillion) in bad debts from banks. An extra US$110 billion was thrown in for good measure.
It works like this: Banks will be able to sell off bad debts, mostly from home loans.
The US government will buy bunches of these at a discount, like 40 cents on the dollar.
It will hold them for two to three years and then re-sell, hopefully at a higher price, like 80 cents on the dollar.
If all goes well, the cost to US taxpayers will not be US$700 billion. It won't even be $0. The government hopes to make a profit on the deal.

The bad
After selling their bad debts to the government, banks will have plenty of money to lend.
The big question is: So what? No one wants to borrow. What good does it do for banks to have lots of money in their vaults if no one wants it?
Consider this: US unemployment is at a recent high, consumer confidence is at a new low and Wall Street is running scared.
One trader said in a moment of nervous panic: 'You can smell the fear in their voices.'
Businesses have been hit hard.
One businessman explained: 'Economists don't get it. Even if interest rates fall to zero per cent, I still won't borrow to expand my factory.
'Why should I? I am operating at half capacity now, so why expand? I don't need a low-interest loan. I need customers!'

The ugly
The mood is ugly. Suddenly, everyone wants to 'manage their risks'. What they mean is 'don't take risks'.
The banks' recent memory is of risky loans gone bad. They are hesitant to go down that path again.
They no longer make 100 per cent home loans. Banks now require a 20 per cent down payment.
Second mortgages are also out. It is borrowing based on a home's price rise. But US home prices have not risen. They have declined over the past three years.
With no loans, no spending and lots of fear, things could slow down a lot.
That's a problem since an economy is not like a car, which is safer when you drive it more slowly.
An economy is like an airplane. Flying slowly is not safer, it's more dangerous. Like an airplane, if an economy slows too much, it will crash.
The recovery
The way to keep the economy flying fast is to give it more fuel.
Another tax cut would help. But there is no mood for that after the US$810 billion bailout.
The US could also lower interest rates. But the key rate is already down to 2 per cent. It can't go much lower.

It means this economic crisis has the potential to produce hardships we have not seen in our lifetimes.