When Humans Bend Credit Rules, Ghosts Appear and Darkness Looms

After having discussed credit card debt in a previous post, it looks an opportune time to bend back a little and take a rather philosophical view about debt. Apparently debt is too important a topic to dispense with easily.

In modern living, it is almost impossible not to be dealing with debt. Debt is a fact of life and while people live, debt looks even more inevitable than “death and taxes”.

As the folks say, only the poorest do not have debt but I seem to doubt so. I think even the poorest owe debt of some kind in the neighborhood or elsewhere. The only difference is that their debts routinely undergo metamorphosis into something they call “charity”.

I think nobody knows exactly when and where debt or the practice of lending money or goods originated. However, it is easy to assume that the practice likely started as soon as man learned to trade goods with each other and particularly when money was invented as a medium of exchange.

In the ancient times, borrowers who fail to pay debt normally get imprisoned or sold to slavery. Even family members can be made security for loans or sort of pawned like jewelry to secure payment of obligations. As soon as a debtor defaults, the “pawned human” almost always get sold into slavery. It looks so inhuman and uncivilized but that’s precisely where humans came from.

Modern society has, of course, evolved and has done away with such inhuman practices. Hence, it has been enshrined in many a nation’s constitution that “no person shall be imprisoned for non-payment of debt.”

Nowadays, people from all walks of life readily borrow money. Debt or its mirror image called credit has become big business. Whether you are a big fish or a small fry, there is some debt or credit scheme available for you.

Come to think of it, we can step back and ask a simple question on why people borrow money or incur debt. The answer, of course, looks obvious . We can say something like people borrow money to tide over a temporary situation where money that is coming has not arrived yet. It is a temporary situation where debt or credit fills in.

In other words, the borrower has capacity or capability to pay. It means an inflow of funds is coming, say from salary, from remittance, from profits of an undertaking or from whatever source. Or he has something of value that can be sold.

In short, on the part of the borrower, there really is something we can just simplistically call “capital”, which, in this context, means funds coming in the future (This probably does not fit in with the economist’s or the accountant’s definition of capital). This makes a lender decide to lend money to a borrower for whatever purpose.

On the part of the lender, he lends the money because he believes the borrower can pay and will pay at a designated time. There is an element of trust involved and this element of trust is called “credit.”

This is very simple and we need not study tomes of credit literature to learn this. It is plain common sense.

Because we have capital then we have credit or be entitled to credit.

Here is where the aphorism “credit is to capital as shadow is to substance” comes in. From substance comes shadow.

Certainly we cannot talk about shadow without substance. Unless, of course, we want to talk about ghosts, ghouls, and other creatures of the dark which purportedly prey upon people and either make their lives frightful, nightmarish or miserable.

By the same token, certainly credit cannot and should not exist without capital. Otherwise, we create ghosts and creatures of the dark.

There are elementary rules of credit and banks and lending institutions have tomes of credit policy manuals to guide every conceivable credit situation. Not to mention hordes of analysts to analyze and recommend every conceivable course of action which any situation calls for.

And yet, one need not mention the subprime crisis which triggered the current dire straits of practically the whole banking industry of the west. Furthermore, one need not mention the increasing incidence of sovereign debt problems.

Pray, tell me, how in Heaven’s name, do banks and lending institutions lend to people with dubious capacity to pay, or downright, no capacity to pay at all? By mistake? Fraud? Or just simply “pure greed” and the desire for quick profits, damn all those credit rules be?

It simply boggles the imagination.

Not being an economist, I will not spend time (other than mentioning these in passing) on the economic implications of these issues. Suffice it to say that these are over-analyzed and over-discussed by economists throughout the world. And the internet teems with literature on such topics.

Reading about such topics, one can’t help but get disturbed and ask questions about where the world is really heading.

I mention this, not to beat a dead horse, but to make us realize that the mentality that gives rise to the subprime crisis is very much with us right now. It is very much alive and kicking.

In fact, the credit card industry is something to watch out. Any credit portfolio with bad debts ranging from 12% to 17% and rising, as is the case in many countries of the west and elsewhere, is a cause for serious concern. With more reason for concern since the subprime crisis is far from over.

Not only that, the actions and practices that give rise to such situations are very much continuing unabated, not only in the west but in our very own countries as well. We discussed this in the post “The Curse of the Plastic – Why We Should Beware of Credit Cards”.

The point I would like to make is: when people bend rules and create shadows without substance, ghosts invariably appear. And when ghosts appear, that is a sure portent of bad things coming.

When ghosts appear, darkness and doom should not be far behind.