Stop Complaining About Credit

Today, there's yet another article agonizing over the lack of consumer credit activity in the U.S. Like so many other articles, this one from the Wall Street Journal attempts to frighten readers, implying that the economy can't recover if credit doesn't revert back to 2006-like levels. That's nonsense. The article's title reads, "Drought of Credit Hampers Recovery." That's inaccurate. A better title would be, "Drought of Credit Slows Recovery."

Let's see a little of what the article has to say:

The drop is a stark demonstration of how banks and other lenders are scaling back, owing to their own exposure to the struggling real-estate market. But it also reflects a reluctance by Americans to hold big loads of debt at a time when the job market remains in bad shape and the value of their homes has fallen.

Revolving credit, consisting mostly of credit-card charges, fell at a 13% annual rate, the Fed said. Nonrevolving credit, which includes auto loans, slid by $2.1 billion, or at a 1.6% annual rate. That was smaller than the previous months' declines, but it came in a month when the federal government's "cash for clunkers" program was giving a big lift to auto sales.

This narrative is useful, because it points out that, both, banks and consumers are choosing to pull back on credit. There's no bad guy here. Both businesses and individuals see that credit was overextended in the past. They believe it makes sense to rein that in a bit. After all, credit is what ultimately caused the financial crisis and resulting deep recession.

Also, just for good measure, the WSJ includes this chart, in case their mere words haven't turned your face pale from peril:

credit 2009-10.gif

Now listen: it's true that more credit would stimulate the economy. More credit means more money spent. More money spent means more economic activity. That's obvious.

But what is credit? It's borrowing. Extending more credit now would be enhancing the economy with money people don't actually have -- at a time when most Americans already have a substantial amount of debt. That's not to say consumer credit is all bad: some credit, particularly to individuals with legitimately low debt levels that need to make a purchase and have a stable income stream to pay for it over some specified period of time, is justified. What's bad is credit for credit's sake, just to set the economy back on fire.

The alternative, of course, is a logical one. It requires patience. The economy must actually heal. Rather than revert back to the credit culture, consumers should have less debt when the smoke clears. That way, when the economy does actually start flourishing again, it will be on a more solid foundation -- so the bottom won't fall out from under us. It will be a legitimate economy built by dollars earned, rather than borrowed. That does mean that the recovery will be slow. But a fast one would be artificial, possibly resulting in another bubble waiting to pop a few years later.