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Impact of Financial Markets on Economic Stability and Growth: The Case of Sub-Prime Mortgage Lending - page 29 / 42

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1/23/2015

Jamshid Damooei, PhD

29

Does the expansion of credit inevitably lead to instability?

The Misconception about credit:

It may surprise many that in “real terms” credit is not money.

It is saved final goods and services.

Money is medium of exchange, store of value, and unit of account. It reduces transaction cost in trade and allow the economy function efficiently. Money allows people channel real savings, which in turn permits the widening of the process of real wealth generation.

Whenever an individual lends some of his money, he in fact transfers his claims on real savings to a borrower.

The borrower can now, by means of money, secure real savings (final goods and services) that will support him while he is engaged in the production of other goods and services.

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