Understanding the Financial Crisis - I

I'm trying to piece together how all the problems in our economy from the last couple weeks affect regular folk.

One affect is the tightening of credit.
Last week The Federal Reserve (and other central banks in Europe) decided to lend money to instititutions to increase the liquidity of the market.
That means banks would have more money to loan.
Which means business and people can borrow money from the bank.
Which means business and people can consume.
Which is what our economy is based on - consuming. Not producing or innovating, consuming.

From an article in The Oregonian on 08/24/2008 by Michelle Roberts:

"Homeowners for years could count on an ever-growing pool of equity for expenses like home remodeling, travel, or college tuition.
Many Americans treated the equity like a piggy bank: Last year, one-third of homeowners had tapped into their home's equity with a line of credit, borrowing on average $48,000. That amounted to $5.4 billion in equity lines, according to the Consumer Bankers Association.
Now, as housing values decline almost everywhere, struggling lenders try to protect their own bottom lines by lending no more than a home's value...homeowners who have dipped heavily into their equity pool are discovering that thier line of credit limits are, indeed, moving objects.
...
Lenders, faced with a wave of foreclosures as a result of lax practices, have little choice but to trim equity credit lines if they are to survive."

So...lending institutions drastically reduce equity lines of credit based on a computer-generated analysis that the value of the home has dropped.

And if you were in the middle of using the credit (remodel, college tuition, etc) then you're out of luck.

*****
1. I don't think consumerism should be the driving engine of the economy. But, that's what we've got right now. The holiday shopping season this year will cause more troubles, I suspect, since many people are tightening their belts.
2. People should never expect tomorrow to be the same as today. They should have a longer view of economic, political, cultural, and life cycles. The problem seems to have come from financial professionals assuming everything would always go up. And the general public, figuring the professionals must know what they're talking about, believed them.
3. Since consumerism drives the economy, it seems there would have to come a point when everyone who has disposable income has what they need, right? Then what happens to the economy? It would stall. So, marketers have to make up reasons for us to want to buy new things. And the only thing that's never satisfied is our ego. The advertisers appeal to the desires of our ego. Which causes its own problems.

I suspect that's a theme I'll come to again as I try to understand the economic mess.