We’ve watched as credit markets have seized up and world governments have pumped trillions of dollars into the banking system. Many of us want to know whether these efforts are working, and when we’ll get back to normal.
According to Business Week, bank-to-bank lending rates in the US have dropped eight straight days (the web page with this article has disappeared since the time of writing). This doesn’t mean that the problem is solved, but we are headed in the right direction. This is as close as I can get to answering the question of whether government intervention is working.
As for question of when we’ll get back to normal, I don’t think we will get back to normal. For many years, “normal” was to lend money to people who couldn’t pay it back. It was normal for investors to buy packaged loans for much more than they were worth. Until we have another bubble that leads once again to lending madness, we won’t go back to the way things were before.
There is nothing sustainable about making unprofitable loans. When banks lend money to a collection of borrowers at interest rates too low to compensate them for the ultimate default rate, someone has to lose money eventually.
Hopefully we will be creating a new normal where the credit worthiness of borrowers matters. People with the best credit should be able to borrow at rates similar to those rates available to them before this crisis. Those with mediocre credit should see an increase in the interest rates they pay, and those with the worst credit should not be able to get loans at all.