Monday, September 14, 2009

Credit Crunch?

Rough translation of this article.

Since the major governments of this planet have arrived at the conclusion that a reckless money-printing policy was the way to go for tackling the current economic downturn, unimaginable amounts of fiat currency have been produced and given out to increase bank solvency. Still, politicians and some among the economic aristocracy bemoan the perceived "restrictive" loan policies of these banks. They are bunkering the money and not giving it out into the economy. Thus, we are supposed to be experiencing a credit crunch.

A credit crunch is a risk-aversive mentality among credit institutions which prevents lending to supposedly creditworthy non-bank customers despite an existing demand. One has to wonder why a careful lending mentality would suddenly produce such criticism, given the fact that the recent financial crash was caused by a lack of foresight and care in lending. Cautious lending is a very social behavior, it protects the assets of depositors and secures the future existence of a bank.

Another worrisome undertone of the debate is the entitlement mentality regarding a loan - there is no "right to credit". Credit, derived from the latin "credere", "to believe", is not at all automatic. In a tribal society with a strong social network, lending on good faith may be an option since peer pressure and the threat of ostracism and expulsion from the community may be sufficient to secure payment. However, in modern mass societies, one needs more security (such as capital or company assets) than just a wholehearted promise. It is self-evident that creditors must act prudently when lending out to strangers, even more so since the position of creditors has been considerably weakened through all kinds of debtor-protection legislation.

Considering this, who but a creditor should be allowed to decide which criteria are important to calculate the creditworthiness of a potential debtor? Who should be entrusted with giving away other people's money to third parties by just assuming their collective solvency?

And of course, it's highly questionable whether there is ever "too little" credit. For an addicted gambler, there will always be too little credit. The statement that "there is too little credit" is a classic case of Hayekian pretense of knowledge.

We should also remind ourselves that only that which has been produced and saved before can be lent out later on. This conspicuous fact is somewhat absent in the public consciousness since our decade-long tolerance of an unrestricted fiat monetary system has created the impression that money from the printing press or digital numbers created through the fractional reserve process by banks themselves are actual capital, which, in reality, is the result of deferred consumption. So on second thought, the credit crunch is really a capital crunch which was caused, at least in the US, by people who were living above their means for years and now lack an understanding of the virtue of saving.

Politicians, tenured economists and talking heads criticize the new conservative lending attitude of banks as this is supposed to hinder the recovery of companies which suffer from a severe decline of demand. However, both Austrian economics and empirical evidence suggest that the panacea of increasing the monetary base and the volume of credit will at best initiate a new business cycle with a pre-programmed recession at its end or, at worst, lead to a scenario of which even a few mainstream economists and pundits are now warning - hyperinflation, Zimbabwe-style.

The fact that demand is decreasing has to do with the former artificial boom created by loads of fiat money. In a recession, we see nothing more than a necessary correction of the structure of production, a redimensioning of overcapacities, a market clearing and the elimination of companies which have wrongly assessed customer preferences. What are additional loans supposed to improve in this situation?

Finally, we should consider what another author of this fine magazine had to say about creditworthiness a few days ago. Humanity in the lending business is, according to this gentleman, "anti-social". He continues, "When there were still debtors' prisons, the little guy could be counted on to repay his loans - he was a safe debtor. He feared imprisonment and this made him a reliable caretaker of other people's money. Today, the progressive state is protecting debtors from such a fate, but at their loss, since lenders are not attracted to them anymore." Conclusion: "Legislators have damaged those who they claim to protect, and are thus anti-social to the highest degree". How true!


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