Borrowing Crisis? (loans, credit, debt, buy)

[cohdane]

If there's such a thing as a philosophical question in finance....


I keep reading about the "credit crisis" and how credit is frozen up. I understand that. But is that only half of the equation? Is borrowing freezing up, too?

In other words, if auto-sales are at the lowest point since 1945, how much is because buyers can't get credit and how much is because there are no buyers. That's a consumer example, but I'm wondering if there are parallels in business.

If everyone is loaded up with as much debt as we hear about and the economy just went south, seems like even if credit was there, people would be afraid to borrow right now.

So what happens when no one wants credit?

[Humanoid]

Originally Posted by cohdane

So what happens when no one wants credit?

Deflation. You can drop rates to zero, but that doesn't mean people will take out loans.

Anyhow, I would think the reduction in auto sales etc etc has more to do with changes on the consumer side as you are indicating than willing buyers being locked out because they can't qualify for a loan. Although, certainly the latter is a factor.

[killer2021]

What happens when no one wants credit? That would probably be a good thing in the long run.

It means the consumer, in the long run, would have more free cash flow to buy things outright rather than spend money on servicing the debt in the form of interest.

In the short term it means many businesses that rely on credit based spending would see massive losses - things like houses, cars and consumer spending in general.

[jimmyP]

I find it amusing that the pundits point to credit as the "solution". Credit and the imprudent use of was the genesis of the problem. Unfortunately since we are no longer a producer economy, we need to rely on debt to survive for our consumption.