Monday, July 4, 2011

Whose Future Is It?

It’s Independence Day; happy 4th of July

Barry Ritholtz of Fusion IQ wrote an interesting piece entitled, “First, Blame the Lenders.” It discusses the Greek mess, but this quote is worth discussion in-and-of-itself:

“Which brings us back to the lenders. What is their role, if not to exercise expert judgment? If they cannot independently determine who is credit worthy and who is not, then why do they even exist at all? We might as well leave piles of money around and ask borrowers to self-regulate their appropriate credit limits.”
“…it is the lender’s job to assign credit, to determine who has the ability to service the debt and who is a bad risk. Indeed, lenders have legal and fiduciary duties to their shareholders, capital sources and regulators….[borrowers] have no such obligations.”

Interesting perspective. It seems more constructive to focus on the fact that transactions take two willing parties. I don’t share the government / Wall Street view that the populous is an ignorant vessel that can only just accept whatever is poured in it. If you are a borrower, it doesn’t seem wise to assume that it is the lender’s responsibility to act in your interest. The lender’s “legal and fiduciary duties” are no more important than one’s obligation to manage one’s own affairs. Yes, one can rationally say “take your credit and shove it.”

It is not lender’s responsibility to “determine who is credit worthy.” That’s the epitome of conceit if they think they determine it. They can’t even guess it. Each individual determines their own creditworthiness by their behavior. Perhaps more focus on education about credit and less on blame would be advisable. It would definitely be of greater benefit to the public.

If one looks at this from a macro perspective, one comes away with a very different view. Credit is originated when someone doesn’t consume (spend) all the income (goods and services) one produces. Who does that? It isn’t the government, businesses, or banks. The consumer sector is the only sector that historically produces more than it earns (i.e., saves). Consumers failing to save can only be offset by borrowing from foreigners (i.e., trade deficits) or brief periods of government surplus (i.e., government debt reduction). Neither can be sustained indefinitely.

From this perspective, one is very likely to conclude that it is more important for consumers to manage their use of credit than it is for bankers and other lenders to manage consumers. With that in mind, this will be the first of a few posting on leverage, an issue ducked in previous postings.

From a personal perspective, whose future is it? Every consumer knows the answer. The borrower is betting his or her future. The lender is just betting someone else’s money.

Now watch the fireworks.

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