Monday, February 16, 2009

Ease credit for whom?

Insights from Peter Schiff on the difference between consumers and businesses in their use of credit:

Consumers default on credit much more frequently than businesses.

This is because businesses typically use loans to expand, and then have greater cash flow to repay the debt. In contrast, consumers typically borrow to consume and in the process do not improve their ability to repay.

As a result, one would expect consumer credit to be harder and more expensive to obtain. But that is currently not the case. Government guarantees have altered the playing field, so that now consumers are still being offered credit while businesses are being shown the door.

By shifting credit away from producers, fewer goods and services will be produced for consumers to buy and fewer employment opportunities provided for them to earn money with which to buy the goods.

No comments: