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Unsustainable Credit Expansion


We are living in credit based economy. To grow the economy, credit needs to be expanded. However, credit expansion will not always necessarily lead to real goods increase. In the most extreme case, all fresh new credit created by banks are used for investing in financial asset only which won't bring any value for real economy. I have 2 questions.

1) Do you agree that credit based economy is prone to create instability due to its potential to be misused i.e. placing "money resource" in unproductive thing ?

2) What can government/private sector do to minimize the misuse for every single credit that is poured into the economy ?

HI Kevlar,

I don't think credit based monetary systems are inherently unstable. I think its USERS are inherently unstable. For example, the housing boom wasn't caused by credit. The housing boom was caused by greedy homebuyers and greedy bankers. So yeah, a credit based monetary system will be prone to instability because its users are unstable.

The govt can implement rules that restrict credit in certain instances. I would actually be in favor of a required down payment law (something like 20% down) on a home and things like that. Collateralizing loans with volatile collateral creates a lot of risk in the economic system so it makes sense to implement common sense rules that restrict the way in which credit is extended. So yeah, there's a role for govt here, but it has to make sense.

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