“(FINANCIAL) JUNCTION, WHAT’S YOUR FUNCTION?”

12/18/08

All through the financial crisis we are experiencing, we have been hearing from the “experts,” and especially from the rugged, free market type “experts” looking for a government handout, that the credit markets have “ceased to function.”

Here’s a thought…

What if the credit markets are finally functioning as they should? What if their period of dysfunction, if you will, was instead that long period, from which we are finally sobering up, during which anyone could get credit? Isn’t at least one of the functions of the credit market to channel credit from lenders to creditworthy borrowers? During the long period during which the “experts” said the credit markets were working as they should, seemingly anyone, even the least creditworthy among us, could get loans. Almost by definition, then, during those halcyon days for which the “experts” yearn and to which our policymakers in Washington strive to return us, the credit markets were indeed not functioning.

The “experts” are whining that “no one can get credit” now. Perhaps they have something of a point; maybe the markets are going a bit too far to the conservative side. But would the financial equivalent of a few cups of strong black coffee be such a bad thing after a decade long binge on the financial equivalent of cheap hooch? I know that my bank is looking for borrowers; it ran a CD special through the end of November and wound up with more lendable money than it needed. My bank’s problem, it seems, is that it is an antiquated institution that is not at the forefront of modern finance and thus clings to the quaint old notion that money ought to be lent to people who can pay it back. If my bank listened to the “experts,” there is no doubt that it could find plenty of deadbeats to take its money off it hands; it could then join the Wall Street tough guy free marketeer types and go to the federal government with the financial equivalent of a tin cup because, after all, the markets aren’t functioning. But my little bank remains obstinate in its atavistic refusal to lend money to people who can’t pay it back. That is one of the reasons I keep our money in that institution.

My bank’s willingness, but inability, to lend provides only anecdotal evidence that perhaps the problem is not dysfunctional credit markets but, rather, very well functioning credit markets. These properly working markets only seem strange because an entire generation of financial “experts” has witnessed only non-discriminating markets with nary a whit of ability to distinguish between good credits and bad credits. And perhaps all the “experts’” whining about credit markets not functioning has its genesis in the lack of genuine creditworthiness of these “experts” and the institutions that grossly overpay them.