Excessive rural credit was one of the important causes of bank failures during the Great Depression.

The proximate reason for all financial crises is excessive credit growth a credit boom that goes bust.

So, too, are signs of newfound policy discipline such as a central bank that seems determined to wean China off excessive credit creation and fiscal authorities that have resisted the timeworn temptation of yet another massive round of spending initiatives to counter a slowdown.

But most have suffered from the opposite syndrome excessive reliance on capital inflows, which, by spurring domestic credit and consumption, generate temporary growth.

Granted, the credit boom itself may be rooted in excessive optimism surrounding the economic growth potential implied by globalization and new technologies.

I think it's excessive Internet use in general, excessive video gaming, excessive new access to pornography.

By levying a tax on consumption at each stage of the production chain, America could reduce the overconsumption that helped feed the recent credit bubble, encouraging savings and investment instead.

After all, excessive and chaotic deleveraging by lenders to emerging Europe and the ensuing credit crunch would destabilize this economically and institutionally fragile region.

Credit Where Credit is Due

The subsequent state directed WMP regulation put a brake on credit creation and sent Chinese stock markets plunging.

Defective growth models in advanced countries, based on excess credit and domestic aggregate demand (and complicated by structural flaws and limited adjustment mechanisms in Europe), led to instability, a crisis, and a large negative shock to the real economy.

Eventually, excessive inflation may erupt, or credit growth may slow, rather than accelerate, if banks faced with very low net interest rate margins decide that risk relative to reward is insufficient.

The credit channel also is not working properly, as banks have hoarded most of the extra liquidity from QE, creating excess reserves rather than increasing lending.

Regulations should also have a strong counter cyclical focus, preventing excessive accumulation of leverage and increasing capital and provisions (reserves) during booms, as well as preventing asset price bubbles from feeding into credit expansion.

Rural Credit

Credit

Banks and credit card companies have become much more cautious about extending credit.

The supply of credit, in other words, resulted from the demand for credit.

C. Avoiding over reliance on imprisonment

Credit histories cannot be shared, because a credit bureau is just getting started.

In their view, there was one cause, and one cause only of the crisis the excessive credit creation that took place when Alan Greenspan was chairman of the US Federal Reserve.

Credit risk is best hedged through diversification across uncorrelated credits.

Overexposure hurts.

So, maybe the word overheated is misleading.

Credit stopped flowing.

Unfreezing Credit

(a) Credit and security structure

Limited access to credit

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Or perhaps it stems simply from unreasoning panic.

Conditions of extreme overcrowding are equivalent to cruel and inhuman or degrading treatment.

Germany s Secret Credit Addiction

Consider also the credit markets.

The third tool is credit policy.

A well capitalized IMF, much better capitalized than pre crisis, should be able to fill this backstop similar to what central banks do (and did in the crisis) to prevent a credit freeze and the inevitable and excessive economic damage that would result.

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Such over investment produces an inevitable collapse.

China s Credit Overdose

Credit and financing mechanisms (bilateral, regional, internal)

c. Provision of credit for small businesses

Ignorance of banking procedures and loan conditions

(Hayekians object to this, arguing that, because the crisis was caused by excessive credit, it cannot be overcome with more.)

The problem is that the Fed s liquidity injections are not creating credit for the real economy, but rather boosting leverage and risk taking in financial markets.

Clarifying ultimate responsibility for credit quality and risk would also reduce intermediation costs by eliminating the need to resort to informal channels, such as credit guarantee and trust companies.

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