Organizations and Markets

Solution to a Credit Bubble? More Credit

8 August 2009 at 9:19 am Peter Klein Leave a comment

| Peter Klein |

As noted before (1, 2, 3), policymakers (and some economists) seem immune to the argument that the credit bubble may have been caused by, you know, too much credit, and that encouraging people to increase their debt levels even more might not be the optimal policy response.

Bill Shughart, a very good economist, notes some disturbing parallels between the monetary and regulatory policies that led to the housing crisis and the US government’s “cars for clunkers” program. Whatever its effect on improving air quality (marginal) or stimulating aggregate demand (barf), one consequence is that people who would not otherwise have taken out a new car loan will do so, increasing total and average leverage in the economy. Will banks be pressured to extend new-car credit to “subprime” borrowers? Well, if all you care about is total lending, this is a good thing.

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