2010-10-15

Some Words About the Credit Economy

There is probably no need for a guy like me to comment on the recent mortgage foreclosure fraud hubbub. It has already been over-analyzed. Adding my thoughts would be duplicitous.

However, this debauchery is the predictable result of the world we live in. Government-guaranteed loans are sure to result in widespread fraud and/or rent-seeking. On this point, I do have a few words to say.

I think is that the whole US economy has learned to run on credit. There are good aspects of this - Most notably, that it flattens out the business cycle. A car company, for example, can sell a steady number of cars regularly if people agree to affordable monthly payments. The alternative is relying on people to pay cash. They'd still sell cars, but a lot less regularly, because it would be entirely dependent on economic conditions.

This is also what happened to the market for personal computers. In the 80s/90s, there was a huge cyclical component to buying PCs because people would only need a new computer once every few years. By the time a company had completely "wow-ed" the consumers into buying the latest PC, they'd go through a huge drought where no one would buy anything, because they got last year's cool PC instead.

ENTER: DELL. Dell specialized in making "custom" computers and selling them to college students for affordable monthly credit payments. ("Dude, you're gettin' a Dell!") Suddenly, it wasn't a market for PCs anymore, it was a credit market.

This business model has spread all across the US economy. As soon as there is sufficient demand for something, it becomes a credit market. If demand increases, then before you know it, it becomes a "necessity." ("You can't be in college without a laptop!") Once that happens, the government is sure to step in and start guaranteeing these loans. Already students can apply their student loans to things like laptops. So once the government steps in, in come the rent-seekers and fraudsters, and the rest is history.