And Now For Some Good News . . .

I’m sure there are many who would not see this as good news, but when I read about contracting credit in the lives of everyday people I was thrilled. Because I expect that many people would not share my positive outlook at this news, let me share why I think this is a good thing for our country.

Brad Rock is the chairman of the Smithtown bank and also chairman of the American Bankers Association. According to the article he views the situation with a similarly positive perspective as I do.

“With marginal lenders in trouble, we have more people than ever coming to us for loans,” said Brad Rock. “So all of a sudden, we can be much pickier in deciding what loans to make and how much to lend. . .

“Now people are going to actually have to have a job to get a loan and they are going to have to make installment payments that are already higher per dollar borrowed than they used to be,” he said, arguing that the debt-fueled prosperity of the bubble years was unsustainable.

The real cause of this crisis is not simply that bankers on Wall Street got greedy, it is that so many of us have become greedy as well. We insist on taking the largest loans we can get and living as far out over the edge of our incomes as possible.

The winners so far are the Brad Rocks of America, the bankers who have emerged unscathed, their capital intact and with enough retained earnings to support lending, on their terms. A residential mortgage from Bank of Smithtown requires 20 percent down and clear evidence of adequate income to repay the loan, as well as a good record of paying down debt. . .

“Now many of these lenders are gone,” Mr. Rock said, “and the small-business borrowers are coming to us, and we are doing good old-fashioned underwriting, and the result is that fewer people are getting loans.”

I see no evidence that the Bank of Smithtown has made substantial changes to their practices. What they are doing now, holding borrowers to higher standards, is the same thing they were doing before when it was easier for many people to get a loan elsewhere. They survived the boom times while playing it smart and now they are thriving in the bust because they stuck to sound practices when so many others were taking risks.

The article is focused on businesses thriving who played it safe, but the same is generally true of individuals. American Express may be lowering the credit limits of half their customers, but they are also raising the credit limits on the other half. Those who have exercised discipline in their spending habits when credit was easy to come by are the least likely to feel a credit crunch now.

I do not mean to suggest that there are not casualties to this credit crunch, but I am confident that the benefits of a nation where people are more aware of the need for wise financial decisions and less prone to living beyond their means outweigh the losses of good people who are having a hard time getting started (which, I suspect, account for the largest portion of those who are feeling the crunch through no fault of their own).