Credit

8 Key excerpts on "Credit"

• 

  eBook - PDF

  Consumer Credit Fundamentals

  • S. Finlay(Author)
  • 2005(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  58 4 The Economics of Credit and its Marketing At its simplest, economics can be described as the science of produc- tion and consumption. It is concerned with the analysis of the demand and supply of goods and services, how these goods are produced, priced, sold and utilized, and the interactions and interdependencies that arise between different goods and services. Economics is a hugely diverse subject covering the financial management of nation states, companies, households and a host of other areas, and it can sometimes be unclear where economics as a subject ends and other disciplines begin, or even whether these subjects are merely sub-specialisms within the wider economics field. The study of economics is often sub-divided into macro economics and micro economics. Macro economics relates to factors having a global or national impact and that can be seen to affect society at large. Micro economics is concerned with more local issues operating at a personal or organizational level. From a Credit perspective, a reasonable example of the difference is demonstrated by the effect of interest rates. The base rate of interest in the UK (the cost of borrowing from the Bank of England) is a macro economic factor. The interest rate charged by an individual lender for its Credit products is a micro eco- nomic one. A change in the UK base rate will affect just about every- one in the country in one way or another, with knock-on effects to house prices, manufacturing output, inflation and other national eco- nomic indicators. A change in a single lender’s interest rate will only directly affect that lender and its customers. There may be some sec- ondary effects seen in relation to the lender’s immediate competitors if as a result of the rate change customers switch lenders. However, the effect of unilateral action by one lender will not generally result in any significant consequences in wider society. S. Finlay, Consumer Credit Fundamentals © Steven Finlay 2005

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Consumer Credit Fundamentals

  • S. Finlay(Author)
  • 2009(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  6 The Economics of Credit and its Marketing At its simplest economics can be described as the science of production and consumption. It is concerned with the supply and demand of goods and services, how these goods are produced, priced, sold and utilized, and the interactions and interdependencies that arise between different goods and services. Economics is a hugely diverse subject covering the financial management of nation states, companies, house- holds and a host of other areas, and it can sometimes be unclear where economics as a subject ends and other disciplines begin, or even whe- ther these subjects are merely sub-specialisms within the wider econ- omics field. The study of economics is often sub-divided into macro economics and micro economics. Macro economics relates to factors having a global or national impact that affect society at large. Micro economics is concerned with more local issues operating at personal and/or organ- izational levels. From a Credit perspective, a reasonable example of the difference is the effect of interest rates. The base rate of interest (the cost of borrowing from a central bank, such as the Bank of England in the UK) is a macro economic factor. The interest rate charged by an individual lender for its Credit products is a micro economic one. A change in the base rate will affect just about everyone in one way or another, with knock-on effects to house prices, manufacturing output, inflation and other national economic indicators. A change in a single lender’s interest rate will only directly affect that lender and its cus- tomers. There may be some secondary effects seen in relation to the lender’s immediate competitors, if as a result of the rate change, cus- tomers switch lenders. However, the effect of unilateral action by one lender will not generally result in any significant consequences in wider society. 101

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Towards a General Theory of Deep Downturns

  Presidential Address from the 17th World Congress of the International Economic Association in 2014

  • Joseph E. Stiglitz(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  What enables individuals to spend more than the resources available (for either consumption or investment) is access to Credit. Credit is different from ordinary commodities. In particular, Credit can be created out of thin air. If the bank gives me a piece of paper which others accept, I can buy goods with it, increasing aggregate demand. The bank can create these pieces of paper almost at will. (There are limits, which I shall discuss shortly.) But this is markedly different from the seed economy discussed earlier: the bank then could only lend out seeds if someone else had deposited the seeds – in effect, had lent the seeds to the bank. Macroeconomic consequences of changes in Credit availability With aggregate demand depending on Credit availability, changes in Credit availability can have macroeconomic consequences. For reasons that we have already explained, adjustments in prices do not instantaneously offset these increases in Credit. Moreover, there is no presumption that the market supply of Credit will ensure aggregate demand equaling aggregate supply. A key function of monetary policy is to provide the requisite coordination: to ensure that the aggregate demand for goods equals the aggregate supply. In the seed economy, there was no need for this – the interest rate adjusted to make sure that the demand for seed equaled the supply. Trust as the basis of Credit This poses the central question: what limits the banks’ provision of Credit; and what would limit it in the absence of constraints imposed by monetary authorities? A Credit economy is based on trust, and in particular, trust that the money that is borrowed will be repaid; and trust that the money that is received will be honored by others. If a financial institution is trusted, it can create “money” (“Credit”) on its own, issuing IOU’s that will be honored by others

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  The Development of Consumer Credit in Global Perspective

  Business, Regulation, and Culture

  • J. Logemann(Author)
  • 2012(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Research on Credit practices can also illuminate the acquisition of marketing knowledge—about consumer shopping habits and preferences, for instance—by various market actors, as Josh Lauer’s work on department store Credit offices shows. Their mining of Credit data even before World War I for direct advertising foreshadowed today’s individualized and segmented marketing. 10 Economic historians have long recognized consumer Credit as a central element of the macroeconomics of demand under the Keynesian paradigm during the middle decades of the twentieth century. For example, with the so-called Regulation W instituted in the United States during the 1940s and adapted by several European governments during the 1950s, states attempted to steer consumer Credit volume and aggregate demand by adjusting mini- mum down payments and maximum repayment periods. Credit use is also of vital importance to the study of household finances and consumer spend- ing behavior. Already by the 1960s, behavioral economists such as George Katona used borrowing patterns as a major indicator of broader consumer attitudes toward the economy at large and consumer spending in particular. 4 ● Jan Logemann Meanwhile, borrowing has become a key indicator of consumer confidence. 11 Despite several common patterns among national Credit policies, however, Katona and others have shown significant national variations in Credit use, and they have underlined the unique centrality of Credit and consumption to America’s postwar model of growth—a finding that several chapters in this volume underscore. 12 Cultural historians point out that practices of Credit use can reveal not only consumer attitudes and expectations with regard to their finances, but also deeper webs of meaning that underlie consumer culture more broadly.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Money and Payments in Theory and Practice

  • Sergio Rossi(Author)
  • 2007(Publication Date)
  • Taylor & Francis

    (Publisher)

  ex nihilo. The Credit that a bank may grant to a firm is therefore related substantially to production. It is production that makes it possible for income to exist and to be lent to banks’ borrowers. Yet, without banks, no income would be produced, as no Credit would be available for firms to pay out the relevant amount of wages. To explain Credit, it is therefore necessary to explain both the emission of money and the financial intermediation carried out by banks in any payment they issue, starting logically with the payment of production costs, which is an income-generating operation, as we shall better understand in the next chapter.

  Before moving on, however, there remains an issue to be discussed in this chapter. In fact, according to traditional analysis, the Credit supply is and can be controlled by the central bank, which affects the money stock, M, via the base money multiplier, m, as epitomized by the textbook formula M = mB, where B represents the monetary base (labelled high-powered money) supplied by the central bank. Banks would therefore be able to grant Credit to the extent that they have enough reserves of liquidity, in the form of high-powered money (as in fractional reserve banking). The supply of Credit would thus depend on the supply of money, which would itself depend on central bank policy. We will consider this issue as a gambit to Chapter 2.

  Money and Credit supply

  Generally speaking, the textbook story admits that banks create money – in the form of deposits, D – as a multiple of central bank money. This story, however, sets off from the traditional hypothesis that the monetary base is an exogenous variable, like the reserve-to-deposit ratio R/D, and the currency-to-deposit ratio C/D, both ratios entering the determination of m

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Basic Economic Principles

  A Guide for Students

  • David E. O'Connor, Christophe Faille(Authors)
  • 2000(Publication Date)
  • Greenwood

    (Publisher)

  First, consider the positive impact of savings and Credit on the demand side of the market. Savings are a source of consumer borrowing. Credit permits people to buy more goods and services today, and pay for these goods tomorrow. In each case, the result is the same. That is, the total demand for products in the economy increases. Economists call the total demand aggregate demand. Next, on the supply side of the market, producers respond to an increase in aggregate demand by increasing their rate of output. Businesses might borrow money or use Credit to expand their business operations—to buy sophisticated capital goods, retrain workers, expand their research and development (R&D), or invest in innovative ideas of entrepreneurs. The result of these activities is greater output for their firms. When enough firms increase their rates of output the total supply of goods and services in the economy rises. Economists call this an increase in aggregate supply. When the economy can sustain higher rates of production over a period of time, economic growth is achieved! Finally, the government can also tap into the supply of loanable funds Page 132 to improve the business climate in the nation. Government borrowing takes the form of selling government securities to individuals, depository institutions, and others. The money the government receives can then be used to improve the nation’s infrastructure and to provide other essential public goods—activities that tend to create jobs, improve the business climate, and encourage production. Page 133 10 WHY DO PEOPLE INVEST MONEY? Chapter 10 examines why people invest their money. Investing money differs from saving money in that there is more risk in investments.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Introductory Macroeconomics

  • Michael Veseth(Author)
  • 2014(Publication Date)
  • Academic Press

    (Publisher)

  Most economists are Ml and M2 watchers. These two money measures tell us much about the spending potential of businesses and consumers even if they are not the perfect measures we would like them to be. Economists debate how important the money supply is and how changes in the money supply affect the economy. Economists agree, however, that money is important. You will hear more about money's controversy in the next three chapters. Money Substitutes Money makes the world go around, but many money substitutes grease the wheels. Near money is not money, but acts like money in specific circumstan-ces. Bus tokens, grocery store cents-off coupons, and gift certificates all act like money at appropriate times but are not widely accepted nor useful in paying debts. Credit cards are an important near money. Many people view their bank card's limit as a more binding spending constraint than demand or time deposit limits. Credit cards are not money. They often pay bills, but are not acceptable in most buying circumstances. Credit cards are just a convenient way for con-sumers to borrow for short periods of time. How do Credit-card companies make money from these financial ser-vices? Most people assume that interest charges are what Credit cards are all about. Unpaid balances earn interest charges of 18 percent and more in many states. Interest on these Credit card loans is an important source of revenue to Mastercard and Visa banks and for companies like American Express and Diners Club. But Credit card economics is deeper than this. Consumers and merchants both pay for Credit-card services. Consumers often are billed an annual fee by card companies. Merchants pay a fee to the companies, too, collected as a discount. If you charge $100 worth of economics books using your Credit card, the bookstore might receive only $95 to $97 from the Credit card company. The difference is a fee the card company collects for its services.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  The Economy of Promises

  Trust, Power, and Credit in America

  • Bruce G. Carruthers(Author)
  • 2022(Publication Date)
  • Princeton University Press

    (Publisher)

  5

  Individual and Consumer Credit

  Much of the development of Credit in the United States since the nineteenth century has involved the expansion of individual or consumer Credit. Businesses have always been embedded in Credit networks, borrowing from some while lending to others. But households faced their own Credit constraints and increasingly individuals are making promises that others can accept or reject. The growth of household Credit, and the role it played in the development of a mass consumer economy, constituted an important part of the economy of promises. If a platinum Visa card symbolizes contemporary consumerism, however, Credit for households long preceded the invention of the Credit card or other modern forms of Credit. Going into debt has been familiar to ordinary people for centuries.

  Debt used to bear a particular cultural stigma. In the late eighteenth and early nineteenth centuries, to be indebted was a type of subservience and was sometimes likened to slavery.1 Debts undermined the independence of farmers and workers and threatened their social status. Extreme indebtedness could put someone in a position of debt servitude, utterly beholden to a Creditor. Indebtedness also signaled a person’s failure to uphold key values of thrift and self-control. Someone who spent beyond their means lacked personal discipline and self-restraint. So debt was something to be avoided, if possible, and otherwise to be minimized. Debts were variably problematic, however, depending on their purpose. Debts accumulated for productive activity (investing in a business or farm) could be acceptable under certain circumstances, whereas debts taken on simply to fund “unproductive” personal consumption were not.

  Despite being heavily stigmatized at the outset, the extent and diversity of household debt grew over time. In different ways and for different purposes, lenders devised new methods to provide Credit to individuals, and people found new reasons to borrow. Debt shed some of its problematic cultural baggage. Since there were so many more families than corporations or firms, consumer Credit has generally involved larger numbers of smaller loans than business Credit. This has meant that the cost and effort of making a loan to an individual are generally higher in proportion to the total value of the loan than for business loans. Since the profit earned on a loan traditionally depends on the size of the principal, small personal loans are therefore relatively expensive to make as compared to large business loans. The incentive to make high-volume consumer Credit feasible meant that lenders particularly welcomed the invention of consumer Credit scoring, automated underwriting, the application of statistical methods to Credit assessment, or other innovations that routinized and simplified the loan process. The quantification of Credit has become particularly advanced for consumers, to the point where most adults living in the United States have their own FICO score and a Credit history tracked by one or more of the major Credit reporting agencies, TransUnion, Experian, or Equifax. Furthermore, consumer Credit has typically paired an experienced lender possessing a large loan portfolio with a much less knowledgeable borrower who lacks experience in how such transactions unfold. Legally, the loan contract presumes that the two sides are equals, but in reality they are not.

  Sign up to read

  Learn more about book