Liam Dann: We should give credit where credit is due

Credit - having been crunched - is a problem which looms large on the economic landscape for us all. In the past few years it has caused such enormous problems that it is almost a dirty word.

We all know we need to borrow less and save more. But "the great deleveraging" is not going to be easily achieved.

The use of credit is deeply embedded in the fabric of capitalism and we can't simply give it up.

Credit has been a part of doing business since a bloke in Mesopotamia paid for his clay pots by promising some of the grain he planned to put in them.

But the computerisation of the financial system and growth of the cashless society has seen its use accelerate at break-neck speed for the past 20 years.

The introduction of easy credit to the masses has been a giant social experiment, one in which the initial results have exploded all over the lab.

So now what? Waging outright war on credit is likely to be as successful as the War on Terror or the War on Drugs.

That is unless we want to go back to the earnest days of the 1950s, when buying a new washing machine was an extravagance planned months in advance and predicated on self-sacrificial saving. My guess is that most of us don't.

Credit is oil that the wheels of commerce need to spin at speeds required for a modern technological civilisation.

Apply too much of it and the machine speeds out of control and crashes. But remove it altogether and the machine will seize.

From one extreme to the other, it is now a lack of credit that is causing Western economies to splutter in fits and starts on the recovery road.

Even Reserve Bank Governor Alan Bollard - who usually talks about consumer credit the way a headmaster talks about smoking on the top field - has voiced concerns about a slowdown in credit growth.

While household and agricultural credit growth has been weak, the really worrying trend highlighted by Bollard this week was the contraction of business credit. Business lending is crucial for the creation of new jobs and new wealth.

One of the great shames of the credit crunch is that the reckless behaviour of households and property speculators now curbs the ability for manufacturers and technology companies to get cash and expand.

These are the businesses that contribute to real GDP growth. The inability to get that credit for expansion is one of the factors the Reserve Bank sees as lengthening New Zealand's recovery path.

The weakness of consumer lending is also problematic.

For more than a year the retail sector has been toughing it out in perpetual sale mode. Consumers are getting smart and are doing very little of their shopping at full price.

While corporate retailers still have the strength to squeeze margins, there are smaller operators falling over every week.

These are the guys being squeezed by both ends of the crunch. Consumers can't or don't want to borrow to buy their goods. Banks can't or don't want to extend the business credit they need to stay in the game.

One suspects there is a lot more retail sector pain to come before the balance is restored.

The Reserve Bank says the great unknown is whether the new cautious attitude to credit is a cyclical phenomenon or part of a bigger structural change. Hopefully it's a bit of both.

Ideally, consumers will gently rein in spending, pay down debt to less apocalyptic levels and then re-learn to use credit in a manner which is not reckless and destructive. In the real world, however, the process will probably be far more erratic.

* twitter.com/liamdann