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

Otherwise, credit will not flow and growth will not resume.

As of this year, 1 of GDP growth is consistent with more than 3.5 of credit growth.

Lack of robust credit growth will hamper private consumption and investment spending.

Today s crisis marks the end of economic growth fueled only by credit.

China s GDP growth, which relies heavily on credit, will take a hit.

Consequently, credit growth remains unchecked until an unforeseen event triggers China s Lehman moment.

Credit growth in the overall economy declined in 2009 as economic activity stalled.

This should be aimed at restraining excessive credit growth, which the monetary growth that follows currency intervention would otherwise cause.

Clogged credit pipes With banks balance sheets contracting, too many small and medium size companies are unable to mobilize credit for investment and growth.

Bankers also claim that higher equity requirements would restrict credit and hinder economic growth.

They have already been tightening the screws on credit growth for several months, with positive effects.

STANFORD, CALIFORNIA The current credit crisis has led to scaled back projections for growth around the world.

However, direct controls on credit growth, while necessary, are often leaky and not very binding in practice.

In other words, the Fed will use regulatory instruments to control credit growth, risk taking, and leverage.

The authorities pursued pro growth policies, including lower interest rates, expanded credit, and a reduction in excise duties.

Booms have similar characteristics strong growth in banks balance sheets and credit, and therefore a rise in leverage.

All countries and policymakers face difficult choices concerning the timing of austerity, perceived sovereign credit risk, growth oriented reforms, and equitable sharing of the costs of restoring growth.

To get more people to borrow more money, credit standards were lowered, fueling growth in so called subprime mortgages.

Even slowing the economy is hard lacking an efficient financial system, credit growth must be controlled directly through banks.

Consequently, maintaining high GDP growth rates requires an ever increasing volume of credit and a continuously growing money supply.

There is a credit crunch, as banks with insufficient capital do not want to lend to risky borrowers, while slow growth and high levels of household debt have also depressed credit demand.

Tighter credit rationing will then further hamper the ability of households and firms to borrow, spend, invest, and sustain economic growth.

But financial repression is hardly painless and almost certainly reduces the allocative efficiency of credit markets, thereby impacting long term growth.

None of these favored categories of credit allocation produce the dynamism and innovation that is needed for long term, self sustaining growth.

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

Credit Where Credit is Due

It would allow the central bank to raise interest rates aggressively to control runaway credit and investment growth, and keep inflation in check.

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

Since 2008, banking sector credit growth in China has been among the fastest in the world, far outpacing GDP growth, and China s total debt has risen from 130 of GDP to 220 of GDP.

Macroprudential controls on credit growth are useful, but sometimes ineffective in stopping asset bubbles when low interest rates continue to underpin generous liquidity conditions.

China s remarkable growth has been financed recently by a rapid expansion of money and bank credit that is producing an increasingly unsustainable investment boom.

Second, the financial system both banks and non bank institutions is severely damaged. Lack of robust credit growth will hamper private consumption and investment spending.

Domestic demand is playing an ever more important role in underpinning growth as interest rates drop and the availability of credit cards and mortgages increases.

The Fed has been trying to slow demand growth and cool the housing price bubble to avoid inflation, but carry trade speculators have been easing credit.

Many economies need to fix the financial sector and restore credit, while many more need to raise productivity in order to boost growth and create jobs.

Under the leadership of Ben Bernanke and his predecessor, Alan Greenspan, the Fed condoned asset and credit bubbles, treating them as new sources of economic growth.

This would enable the PBC to manage domestic demand by allowing interest rates to rise in order to rein in credit growth and deter reckless investment.

While subdued liquidity and credit growth are delaying the inflationary impact of the Fed s determination to expand banks already massive reserves, America cannot escape inflation forever.

Credit

Credit

STANFORD, CALIFORNIA The current credit crisis has led to scaled back projections for growth around the world. Governments and central banks are responding to damaged balance sheets and credit lockups in an attempt to limit extreme harm to their economies outside the financial sector.

In 2011, for example, the BRSA adopted a loan to value regulation on mortgages in order to limit rapid credit expansion stemming from growth in consumer loans.

Measures that promote general economic growth in rural areas should benefit forest related enterprises, for example through access to credit, infrastructure development and improved access to markets.

Indeed, without access to affordable credit, economic growth, competitiveness and international trade could not be fostered, with enterprises being prevented from expanding to meet their full potential.