Sunday, October 05, 2008

Financial Fuss (3) - Less Debt

The volume of credit available has declined. This should not surprise anyone given that we have just experienced a decade of easy credit. That flush of credit produced the housing bubble, the commodity boom, and previously the dot-com bubble, so it is a good thing that it has come to an end. However, the end of easy credit will change many things for many people and businesses.

Banks will be more cautious about the way they issue credit. Home owners will no longer be able to obtain ninety or one hundred percent loan-to-value mortgages. They will not longer issue “no documentation” mortgages. Thirty or forty percent deposits will become the norm for home buyers. This is not a problem, but sensible banking practice. A return to sound banking practice will be good for households and businesses.

The American economy and American people have too much debt. A decline in the availability of credit is good for both. People will have to start saving for their future and saving to buy the things they need. Businesses will have to start investing their surpluses, rather than paying out big dividends and relying on credit to fund their expansion. Everyone will have to become more responsible.

1 comment:

Ron McK said...

I have just read that California is having trouble rolling over loans. Something is dreadfully wrong when a state as wealthy as California is so dependent on debt.