A Coin Has Two Sides - When Someone Borrows - Another Person Must Lend!

A Coin Has Two Sides

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Debasis Banerjee, July 2011

When someone borrows - another person must lend!

Infatuation with the glory of mythical irrationality of the borrowers temporarily stuns the wisdom of even the acclaimed people as they forget to examine the other side of the coin - rationality of the lenders. "Bubbles on beer budget poor life choice" by Gareth Morgan raises a fundamental question but, ironically, about a popular myth - a free choice and a contractual agreement made legally by two happy parties is a "poor life choice" - who are you preaching Grand Pa?

Shall we momentarily climb over the cliché of condescendence towards the Kiwi borrowers' mythical irrationality and go down respectfully to explore the other side of the coin, the rationality of the lenders? Are they crazy too? Why have they been lending so much to encourage the Kiwis to enjoy "bubbles on beer budget" for as long as one "can remember"?

Actually, economic literacy demands that we do remember - because, the year when foreigners began to trust the New Zealand banks with their precious funds coincides with the birth of a new era of free trade with a flexible exchange rate regime. And, it was not just a coincidence but a consequence of economic rationality. The steady flow of scarce capital from the outside world to the private sector allows some to enjoy "bubbles on beer budgets" as they perceive upward mobility from economic growth - economists call it "consumption smoothing".

However, even that misleading imagery of consumer irrationality is a cliché and an unfortunate one.