The Credit Snobs

I rather like the title "voodoo priest of free market economics" so I am happy to take the blame for the sub-prime mortgage defaults and at the same time stick a few pins in Nouriel Roubini.

Roubini and others generating hysteria about defaults in the mortgage market are credit snobs – they think credit is something that only the rich can handle.  Just look at the language that Roubini uses to analogize borrowers – they are "reckless patients" who "spent the last few years on a diet of booze, drugs and artery clogging junk food."  Similarly, the Washington Post tells us that it’s the end of the "borrowing binge."

Yeah, we get it.  Credit is ok for us, the "sober" borrowers but poor people can’t handle credit.  Too much credit among the poor generates decay and social pathology.  Credit must be regulated.  We can’t, for example, have credit stores in poor neighborhoods.  Don’t you know that credit is bad for people without self-discipline?   Let the poor buy on installment credit?  That’s unconscionable.  Today’s furor over sub-prime mortgages is the same old story.

Basic economics says that people should borrow so that they can consume based upon their permanent income.  Modern day financial markets are finally making this possibility a reality.  Combine financial innovation, strong US economic performance and a global savings glut and it makes sense that credit should become easier to obtain.  We see the benefits of financial innovation in bringing credit to the poor not just in the United States but around the world.  Will Roubini
next be calling for the retraction of Muhammad Yunus’s Nobel Prize?

The fact that there are defaults is partly a learning process in response to financial innovation, and thus evolution, but also partly a simple matter of risk.  Defaults are to be expected.  I see no reason to expect contagion.  All lending statistics must now be marked to the global financial market which means that diversification is now more extensive than ever before and thus net risk is lower.  Moreover, the whole point of recent financial innovation (and reformed bankruptcy law) has been to reallocate risk way from borrowers and towards those lenders in the world wide market for capital who are in the best position to handle the risk. 

The democratization of credit worries the credit snobs.  The credit snobs fear that capitalism isn’t just for the rich. 


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