Credit Extension

Alex Tabarrok comes forth with another excellent Post on the extension of Credit in this Country, plus some Commentary on the advantage of supplying Credit to the Poor in Developing Countries. He claims there is a Credit Snobbishness exhibited by Those who worry about the current Debt levels in this Country; something which I myself can identify. The Point he misses in my estimation comes with the Statement that the real Credit Crisis resides in the overuse of Credit by the Well-To-Do in this Country. There has been too many facilities, like the Mortgage tax credit, created that all entice the Well-Off to adopt continual Credit level maintenance. Most Economists would assert such practices maximize the utilization of Budget management through effective use of Credit opportunities. It is a position I have great difficulty in accepting as a sound policy.

Credit extension has the unfortunate Side-effect of uniting the Economy in a manner where the concept of ‘economic shedding’ works most ineffectively. Stability of the overall Economy can isolate any failing sector under normal economic conditions, and can supply financial and other resources under the natural economic order. Extensive Credit also does not tie the Economy overmuch, if such Credit remains limited to Those who must have such Credit to be vital Participants in the Economy. The equation changes, though, when Credit is overused. Use of Credit by Those who lack real need for it, simply as a Profit-making advantage, can integrate the Economy through Credit extension across Sectors without need. Capital reserves which should be retained for viability of economic Sectors will be drawn from vital sectors, as Credit nodules fail in underperforming economic sectors; the Whole suffering an economic impact which should have been limited to a specific sector.

The central banking systems were designed and operate as a Risk-spreading network with the ability to isolate a poorly performing economic sector from the Whole; by diffusion of bad Credit over a spectrum of good loans. This ability, though, remains limited in extent; the proliferation of Credit instruments outside of the spectrum of activity of central banks cripples this authority, and multiplies the actual Sums involved in the extension of Credit. The ability is worst injured by the need to diffuse excessive amounts of bad Credit loans which were basically unnecessary in the first place. I actually am a Credit Snob as well, but One who attests that Credit extension should be limited to Those who actually need it, whether they are Poor or Rich. lgl