Yes, this is the great danger. This is why we see evidence of FED panic ( 2 large cuts in a week despite rising inflation ).
If the banks don't want to lend, they have no motive to borrow ( from the FED ) and lower rates become irrelevant. Banks simply won't take advantage of the lower rates and liquidity dries up. Even essentially worthless fiat money ceases to circulate and the economy freezes up.
Banks don't want to lend because debt is at saturation levels and debt default is climbing; any lending is throwing good money after bad.
Unless the banks can be motivated to accelerate their lending there is no way to avoid a depression.
The Stimulus Package just passed is a way of creating more room for debt but it needs to be 10 x's bigger to be meaningful. This, of course, couldn't be covered by merely lowering taxes. Washington would have to borrow against the future ( raise the deficit ) to make it work. In effect, Washington would assume personal consumer debt. This is bad, but not nearly as bad as what will happen if nothing is done.
Paulson is calling on the banks to own up to their losses and get back to the business of lending; how can they lend if there are no credible borrowers?
