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Impact of Financial Markets on Economic Stability and Growth: The Case of Sub-Prime Mortgage Lending - page 31 / 42

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1/23/2015

Jamshid Damooei, PhD

31

Does the expansion of credit inevitably lead to instability?.....continued

Unbacked lending and economic instability:

A factitious claim on real saving can cause the problem.

The borrower who holds the “empty money” exchanges it for final consumer goods.

Note that the borrower takes from the pool of real savings without any additional real savings having taken place, all other things being equal.

The genuine wealth producers, those who have contributed to the pool of final consumer goods — the pool of real saving — discover that the money in their possession will get them fewer final goods.

The reason for that is that the borrower has consumed some of the final goods.

The problem is the diversion of real wealth from wealth-generating activities towards the holders of new money, which emerged "out of thin air."

Consequently, with less real savings, less real wealth can now be generated.

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