Wednesday, December 3, 2008

"Credit Availability" vs. "Creditworthy"

In light of the economic times and the endless stream of politicians and talking heads discussing the world "Credit Crisis," I thought I would bring up something that has heretofore not been mentioned, but should be discussed when delving on the problem in your classrooms.

DISCUSSION QUESTIONS: Is the current "Credit Crisis" a lack of credit availability? Or, is it a lack of creditworthiness on the part of the borrowers?

CONTEXT: We have been told the current economic crisis is a result of a "housing bubble," where banks extended loans to people with poor or no credit histories. Now, homes across the country are going into foreclosure, as those people can no longer pay their mortgages as the rates have reset. Which, in turn, has made the mortgage backed paper and securities worthless, creating huge losses for financial firms and investors.

To increase liquidity, the Fed and the Treasury has created a "financial backstop" through a number of instruments to get money back out to the public and businesses. But, today, banks appear unwilling to loan the money.

Why? Revert to previous discussion questions, and add a number more like, "If you were a bank president would you be lending money? If so, what would be your credit standards?"

You might be surprised to find out the student's answers. I know I was.

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