Dec 29, 2008
What is Credit?
Or why the credit crunch of recent times and its solution(s) seem rather off base:
“There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the other hand,is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan. The banker is not giving him something for nothing. He feels assured of repayment. He is merely exchanging a more liquid form of asset or credit for a less liquid form.”
This is a fundamental issue of what Credit means – in so much as the lender of capital has something to give, the user of capital has also something to offer – this is a transaction of promises. Several aspects of our current situation follow a definition of credit apart from this fundamental transaction – in many aspects, our current situation can be ascribed to a focus on the mechanical aspects of credit transactions.
The solutions engaged in by the Fed also smacks of the same – printing out more money and asking (and when that fails, forcing) the banks to lend it. Lend it to whom? To those who need it (even to survive) or to those who have a track record of value creation? In so far as much, lending takes places or doesn