So is this good or bad overall? Because people are giving money to banks, rather than spending it, it should be raising bank's capital. Right? So the Fed won't need to give as much money to the banks, because people are giving it to them to pay down their debt?
OTOH, if people aren't spending, then unemployment goes up, which is bad.
Unless people aren't paying down their debts, but rather going bankrupt and the banks are writing them off. Then we're in trouble.
People should be paying off debt, better yet, they shouldn't be living off credit to begin with, it's unsustainable. Getting Americans back to living within their means is not trouble, it's the long term solution.
While previous credit levels were too high, a reduction in credit means a reduction and consumption and hence demand. Overall, this further shrinks the economy, reducing income and thus savings.
Ah, but in the current climate, where everybody is worried about banks failing, another big bank failure could freak everyone out and cause another catastrophe. So perhaps propping up the banks increases sentiment more than increasing consumption in 2009?
Good. The demand was being supported by artificial means and wasn't sustainable. It's bringing the economy down to a sustainable level. Better a smaller sustainable economy than an artificial one that bubbles and crashes routinely because of debt based consumption.
OTOH, if people aren't spending, then unemployment goes up, which is bad.
Unless people aren't paying down their debts, but rather going bankrupt and the banks are writing them off. Then we're in trouble.