Thank Goodness We Can Borrow Again

Credit makes the world go 'round. It's part of the modern world, like electricity. In the banking crisis of the last year, the lights went out. Credit went away. It's what made the recession as deep and as scary as it was.

Lots of people think credit is evil -- that borrowing is a sin. They quote Shakespeare, saying "Neither a borrower or a lender be." I've never understood what was supposed to be so damn profound about that statement -- except that Shakespeare wrote it, so I guess it sounds impressive to say. It doesn’t say what's so bad about borrowing or lending. It just says don’t do it.

You can see what happens when you follow that advice. It's not so virtuous, is it? Recession. Near-depression. The world almost ended. Now the world is recovering, in large part because the ability to borrow and lend has come back. The lights of the world are coming back on.

It's not that people are borrowing their way out of recession. Yes, governments -- especially the U.S. government -- have run up a lot of debt in the name of "stimulus.” But so little of that money has been spent, we can't rationally give it -- or the borrowing that made it possible -- much thanks for causing the recovery.

In fact, ordinary people have cut back on their borrowing. Consumer credit is currently declining at three-month annual rate of more than 7%, the worst such decline since the early 1940s!

Surveys show that the problem isn't that they can't borrow more -- they just don't want to. That's actually typical during recessions. As soon as the recession is over, borrowing resumes. I think this recession is over, and we should expect to see more borrowing in the coming months. Let's not say it's a bad thing when it happens -- it's a symptom of getting back to normal, an indicator that good times are coming back.

Mortgage borrowing will probably recover more slowly than standard consumer credit -- by which I mean credit cards, auto loans and the like. In fact, it may never "recover," if by that we mean going back to the frothy peaks of four or five years ago when you didn't have to put any money down, or even supply any financial information about yourself.

That is not just because banks are scared to lend after the housing meltdown of the last three years. They've just learned that loans work out better when the borrower has some skin in the game in the form of a down payment. And what do you know -- it's a smart thing to be sure that the guy you're lending a couple hundred thousand dollars to has a job. So now you have to do a little working and a little saving before you can borrow to buy your dream home. Is that so bad?

For the overall economy, the biggest news in credit is that so-called "toxic assets" -- the risky credit-linked securities that collapsed in the panic last year and took the balance sheets of all the world's major banks down with them -- suddenly don’t seem so toxic anymore. Of all the asset classes in the world, risky credit instruments have rallied the most over the last six months of recovery.