Naked Capitalism has a
great guest post today which exposes the incentivization process at work in the credit system:
"One source of credit market friction arises from coordination failures among lenders (see for example Gorton and He 2008). In these models, banks are heterogeneous and their behaviour strategic. The individually rational actions of heterogeneous lenders can generate collectively sub-optimal credit provision in both the upswing (a credit boom) and the downswing (a credit crunch). This is a collective action, or co-ordination, problem among banks.
...
"In the face of stiffening competition, banks were increasingly required to keep pace with the returns on equity offered by their rivals – a case not so much of “keeping up with the Joneses” as “keeping up with the Goldmans”."
So we see that the underlying cause of the expansion of credit is the valorization of capital. Not only the simple valorization, but the competition for capital (which I hope to cover soon on its own right) serves as an important ossifying process for companies which cannot necessarily sustain this model:
