Mechanization of Credit
The problem with this low-credit, low-risk environment:
profits were slim, not just for banks but for retailers and the real estate industry.
If people had to save up to buy a new item of clothing or an appliance, then the retailers were limited in how many gew-gaws they could sell.
If people stayed put and didn't buy and sell their houses frequently, then developers, lenders and realtors had a very limited field of profit-making opportunities.
If only people who qualified via stringent credit standards had access to credit, then the transactionf ees and interest earned from credit were also limited.
The "solution" to that low-risk, low-churn, low-credit environment was the commodification and mechanization of credit.
An analogy can be found in industrial consumer goods such as autos. When autos were hand-made by artisanal craftsmen, they were extraordinarily expensive. When Henry Ford mechanized the production, effectively turning them into mass-produced commodities, they became affordable to tens of millions of households.
The same thing happened with credit when computers took over the task of qualifying borrowers.
A computer program assessed credit on a simple point system, and voila, the costly task of assessing credit risk fell to pennies per borrower.
Not entirely by happenstance, banks found that millions of households that had been viewed as risks now qualified for credit, as the issuing and servicing of credit--credit card annual fees, transaction fees, late fees, etc.--became a fast-growing, monstrously profitable gusher for banks.
The Origins of American Debt-Serfdom
http://www.wealthwire.com/news/liberty/2075
profits were slim, not just for banks but for retailers and the real estate industry.
If people had to save up to buy a new item of clothing or an appliance, then the retailers were limited in how many gew-gaws they could sell.
If people stayed put and didn't buy and sell their houses frequently, then developers, lenders and realtors had a very limited field of profit-making opportunities.
If only people who qualified via stringent credit standards had access to credit, then the transactionf ees and interest earned from credit were also limited.
The "solution" to that low-risk, low-churn, low-credit environment was the commodification and mechanization of credit.
An analogy can be found in industrial consumer goods such as autos. When autos were hand-made by artisanal craftsmen, they were extraordinarily expensive. When Henry Ford mechanized the production, effectively turning them into mass-produced commodities, they became affordable to tens of millions of households.
The same thing happened with credit when computers took over the task of qualifying borrowers.
A computer program assessed credit on a simple point system, and voila, the costly task of assessing credit risk fell to pennies per borrower.
Not entirely by happenstance, banks found that millions of households that had been viewed as risks now qualified for credit, as the issuing and servicing of credit--credit card annual fees, transaction fees, late fees, etc.--became a fast-growing, monstrously profitable gusher for banks.
The Origins of American Debt-Serfdom
http://www.wealthwire.com/news/liberty/2075
