Financing

The Federal Reserve’s new $800 billion effort to combat the financial crisis is designed to make credit more accessible to shaken consumers who aren’t sure they want more debt.

Households and lenders may not respond much because of the wealth destruction from plunging property and stock values, and the deepening economic slump, economists say. That means banks may end up returning the Fed’s new liquidity through deposits at the central bank.

“We are sort of spitting in the wind,” said Michael Darda, chief economist at MKM Partners LP in Greenwich, Connecticut. “Banks won’t be throwing a lot of loans out there when they fear — rationally — those loans may not be paid back.”

Policy makers are hoping that by injecting liquidity into the market in the form of direct equity investments in banks, and easy loans to lenders, that they will open up the business credit market and consumer credit market. There is general agreement that a generally liquid capital market gives businesses and entrepreneurs the mobility and leverage that they need to create wealth. In a constricted market, more and more businesses become paralyzed, transactions never occur and wealth evaporates. Unfortunately, today Fear rides supreme over Greed, and even easy money isn’t enough to convince most banks to put their capital at risk.

Read the rest of the story here at Bloomberg