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Every day that passes contradicts this statement.
Central banks and governments around the world have so far tried a
variety of means to prevent the collapse of credit markets. They
have repeatedly injected cheap liquidity into banks, purchased
mortgage-backed securities and commercial paper, nationalized banks,
insurance firms and mortgage finance giants, increased the amounts
of deposits insured and forced interest rates lower.
Nothing has so far succeeded. Stock markets continue to slide down,
investors everywhere are fleeing for safer havens and we learn every
day of a new major firm on the verge of bankruptcy because it is
short of cash.
Perhaps the reason is that, contrary to the above statement,
macroeconomics is far from reaching the age of maturity. It seems,
rather, to be stuck in the age of fairy tales and based on the
belief that credit grows on trees.
Decades of money and credit creation by central banks and commercial
institutions through the mysterious workings of the fractional
reserve system have nurtured this strange belief, to such an extent
that almost nobody seems surprised to read every day in the press
that governments and central banks are trying to "bolster credit
markets." But where in the world does all this new credit come from
if resources can't suddenly appear out of nowhere?
It is worth recalling what credit actually is, since so many people
seem to have forgotten. It is necessarily based on savings, that is,
the surplus left over when people choose not to spend all their
earnings but to keep some for later consumption. This delayed claim
on resources can then be temporarily offered at a price to other
people, who either want to consume something before having the means
to do so, or invest resources they don't have in capital goods to
increase their production capacity and eventually their profits.
In a free credit market, interest rates would find a natural
equilibrium on the basis of the supply of savings and the demand for
credit. The more people are willing to postpone consumption, the
more savings there will be on the market and the lower interest
rates will be, thus facilitating investments. Conversely, higher
demand for credit will drive up interest rates and encourage people
to save. This is how financial markets co-ordinate the actions of
producers and consumers through time, making sure that resources are
allocated in the most efficient manner possible.
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