Credit on the Personal and Macro Level

A couple of items caught my eye this morning. Both dealt with forms of credit and how these forms relate to the current state of the economy. The first was this article in The Washington Post. The story provides a brief insight into the history of the credit card, as most of us are familiar with it. It goes back to 1981 when the state of South Dakota allowed banks to charge whatever interest rate they wanted on credit cards. This changed the availability and use of credit cards from its previous, more restricted, role.

But the article also examines how credit card losses in the most recent recession have impacted issuing banks; and how new legislation may impact banks' choices on who gets cards. The article makes a convincing argument that credit was too easy, and that this ease led to misuse. And the misuse put many individuals into circumstances that could not withstand an economic downturn and an interruption in income. I understand the logic, but I'm not sure the entire history of the role of credit in this downturn is ready to be written.

And that's because of another interesting piece of the puzzle is brought up in this post on the Voxeu web site. The author is an economist at the Federal Reserve Bank of Boston. And his research is in the role of housing equity in the credit market. Specifically, he looked at how homeowners were using equity in their homes in the period prior to the housing collapse. I have often heard arguments that individuals used escalating home values as collateral for home equity loans and lines of credit, using that credit as if it were an ATM to fund rising standards of living - essentially a mechanism for extracting the wealth from the wealth effect.

The author says his research doesn't support that explanation. Indications are that people were not treating their homes as ATMs to finance current consumption - at least not at the levels previously thought. Rather, his evidence shows that what was extracted may have been used to finance residential and household investment to a greater extent than was previously thought.

All of this made me think of an old but interesting book that I have recommended before and will recommend again: Money of the Mind by James Grant. It more than 15 years old and is in need of a new edition. But the history of credit in the United States from the early 19th to the late 20th century is an interesting one. And there is much in the book that provides a set-up to the current situation. I'll put it on my carousel at left in case anyone is interested. I found it an interesting read and if you like weightier subject-matter, I would even call it a "beach read."