Quote of the Day

“Sorry to sound like a broken record,* but journalists keep babbling about the ‘reduction in credit’ as if it’s necessarily a bad thing. They don’t know any basic finance theory, which says that in well-functioning capital markets, positive NPV projects are funded and negative NPV projects aren’t. The talking heads think that the total number of projects funded, or the total amount of funding, independent of quality, measures the health of the financial system (and more is always better). They point out that consumers are finding it more difficult to get mortgages, that credit-card issuers are lowering borrowing limits, that firms are facing a higher cost of capital. (Of course, as we’ve pointed out before [12], wild claims about credit markets being ‘frozen’ are preposterous.) But changes in the allocation of credit are inefficient only if previous credit arrangements were somehow optimal.

Peter Klein

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