Today's Squeak From The Wheel™ has to do with the campaign seemingly being waged against all forms of credit, as opposed to realizing that there is a substantial difference between credit used to buy something that pays for itself, and credit used to buy something that does not generate income. As always, I encourage you to plagiarize these ideas mercilessly (they aren't mine, anyway), and write your own letter or two.
The quote from Charles Kindleberger in Tuesday's Wall Street Journal ("Review & Outlook: Surviving the Panic," WSJ, 09/16/08, A24) while correct, left out a very important qualification: financial manias throughout history have shared one trait: the excessive expansion of credit . . . for the wrong reasons. There is nothing wrong with credit extended for financially feasible projects, that is, for the purpose of capital formation, "capital" being (in this context) something that pays for itself out of its own earnings. Extension of credit for productive purposes was, as Dr. Harold G. Moulton of the Brookings Institution pointed out in his 1935 classic, The Formation of Capital, how the United States financed the explosive growth it experienced between 1830 and 1930.
Examining financial panics throughout history, whether Holland's Tulip Mania, John Law's Mississippi Scheme, the South Sea Bubble, the Panics of 1819, 1837, 1873, 1893, and 1907, the Florida land rush, the Crash of 1929, or the current sub-prime mortgage debacle, we find that in each and every case the bubble resulted from diversion of credit away from productive purposes and, often, into non-productive, speculative ventures. Subsequent drying up of credit for productive purposes — capital formation — plunged the affected economies into recessions and depressions, from which in some cases the economies took decades to recover . . . just in time for the next round of speculative frenzy as people eschewed hard work and sound credit for capital formation in a quest for the fast dollar financed by other people's money. The perverse insistence on expanding bank credit to finance speculation and government debt, while leaving industry, commerce, and agriculture to seek financing out of existing savings or do without, has crippled economic growth ever since the beginnings of central banking in the 15th century.
The problem is not that credit is bad, but that the wrong kind of credit is bad, as Aristotle pointed out twenty-five centuries ago. Lending or creating money for something that does not generate income to repay the loan and charging interest is called "usury." Pagans, Jews, Christians, and Muslims have condemned usury from the dawn of recorded history. Lending or creating money for something that generates income to repay itself is not, however, usury, and is even in some circumstances considered the eighth or highest form of charity.
A proposal that would allow the Federal Reserve and the commercial and investment banking systems to function as intended is "Capital Homesteading for Every Citizen," from the book of the same title. It is certainly worth looking at, especially since no one has managed to come up with anything other than a New & Improved socialism.
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