Credit Crunch Analogous to Blocked Artery
If you don’t have a Ph.d in economics and have been a bit mystified by the urgent tone in Washington and on Wall Street, here’s a good analogy:
The ongoing credit crisis (and freeze) is to the economy what a blood clot is to a person. If the clot goes to a particularly important organ, like the brain or heart, the lack of oxygen can quickly cause serious, permanent damage — even if the affected organ was perfectly healthy before.
So, too, a a credit crunch can threaten even sound companies. In a broad contraction — which is what a recession is — sales fall, accounts receivable rise, and credit becomes more expensive — if it’s available at all. At the household level, unemployment rises; credit cards get maxed out and new ones aren’t available; and home equity becomes tougher to borrow against.
The government’s job, then, is to bust the clot. Quickly.
One way to do that is to prescribe blood thinner (print more money). Another is to recapitalize the lenders (blood transfusions), so they’ll lend again. That’s what TARP (“Troubled Asset Relief Program”), in all it guises, has been about.
Credit is to capitalism what oxygen is to the body. At the moment, the U.S. economy is slowly turning blue . .