Richard Werner (see video below) distinguish three types of credit:
- For productive purposes;
- For consumption;
- For speculation.
Werner states that only type 1 is sustainable as it contributes to economic growth. Type 2 is in his opinion unsustainable as it leads to inflation, because the same amount of goods and services in the economy is pursued by more money. However, one could argue that the increased demand as result of consumer credit also stimulates production and hence results in more employment.
Credit of type 3 is very unsustainable as speculation with borrowed money leads to asset bubbles. In our opinion this type of credit should be prohibited. Speculators should use their own money to gamble with.
Werner believes that government intervention is required, because without banks have strong incentives to provide credit to speculators. This because banks can make more money from lending money to speculators than to productive enterprises. Further he argues that intervention in credit creation sectors, will result in less intervention elsewhere in the economy.
In the context of the Mordan Financial Service Act, we propose the following measures.
Advertisements, of all types, for consumer credit will be forbidden.
Revolving credit will be forbidden.
Unsecured personal loans provided to consumers are limited to three times one’s average annual income over the last five years. Loans beyond this limit will require collateral.
Secured loans are limited to seventy-five percent of the value of the collateral.
Persons below the age of twenty years can only get a loan if an older credit-worthy person will serve as a grantor to this loan.
All provided consumer loans will have to be reported to the federal bureau for credit registration.
Further compounding interest will be prohibited and simple interest rates may nor exceed the maximum interest-rate set by the government.