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View Full Version : The role of credit in booms and slumps



Rajiv
08-24-07, 09:37 AM
PAUL D’AMATO explains (http://www.socialistworker.org/2007-2/641/641_08_Credit.shtml) how debt greases the wheels of the capitalist market--until it doesn’t.


THE WORLD economy experienced a global credit crunch last week. Suddenly, nobody wanted to lend, and nobody wanted to pay money out.

The crisis of “liquidity,” that is, of available cash, prompted the U.S. Federal Reserve Bank, the European Central Bank and Japan to inject billions of dollars into the markets in order to stabilize them. The Fed also reduced what is known as the discount rate--the rate at which it lends money to banks--by 0.5 percent.

The cause of the crunch was the deflation of the massive housing bubble as a result of the extension of large numbers of “sub-prime” loans--loans to borrowers with bad credit--which led to the collapse or near collapse of several financial institutions that held these loans. An unknown number of financial institutions, many of them unregulated funds, had “exposure” to these loans and are in danger of bankruptcy.
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This is perhaps a good time, then, to step back and take a look at the role of credit in the capitalist economy.