According to the Office of the Comptroller of the Currency (OCC), banks are back to stupid in an era of debt deflation. By loosening borrowing standards they are increasing credit risk at the very time people cannot pay on the current debt. Sound familiar? It should, if you were not comatose in 2008. Not only are debts not paid but consumers have less money to buy (unless on credit - yet more debt) which further shrinks the economy as goods eventually cannot be bought.

As Michael Hudson describes, “The financial overhead has grown so large that paying interest,amortization and fees shrinks the economy. So we are in for years of debt deflation. That means that people have to pay so much debt service for mortgages, credit cards, student loans, bank loans and other obligations that they have less to spend on goods and services. So markets shrink. New investment and employment fall off, and the economy is falls into a downward spiral.”

So instead of keeping debt creation low, the banks are doing the opposite, AKA stupid.

Reuters reports, “Looking at 90 percent of the debt in the federal banking system, equal to $5.2 trillion, the OCC found that banks are easing standards because of competition from other banks and non-financial firms, their appetite for risk is expanding, and they are seeking to make more loans.” This is what is called bubble creation. Lend out to people who will buy up assets, such as real estate, and not be able to pay the debt at which time the bubble bursts and asset values fall. Stupidity begets disaster.

Read more about debt here in my related column of 28 September, World Economy on Crutches.