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What Is Loose Credit?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 25 March 2018
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Loose credit is the term used for a specific monetary policy in which a nation's centralized financial body infuses the economy with large amounts of money, or currency. They generally doing this by buying securities backed by the nation's Treasury department or monetary supply. This filters down into individual banks, which then have the opportunity to attract more borrowing customers by lowering interest rates and making it easier to get credit. Using a loose credit policy can stimulate a national economy because it can lead to more spending by the public, although long-term implications include currency devaluation and the possibility of inflation.

There are times when certain national governments feel the need to influence their economies in response to stagnation. Although some economists may feel that the market itself will rectify any economic problems, others feel that government intervention through some sort of active policy is necessary when warranted by specific situations. One such active policy used by governments is the policy of loose credit, which attempts to invigorate an economy by strengthening the borrowing capabilities of its citizens.

The first step in a loose credit policy is generally a government's decision to add great amounts of currency to the economy. This can be done by buying up various government securities. As a result, more currency is added to the central banks in a country. From these banks, money filters down through smaller banks. Overall, this causes more money to filter throughout the banking system, and this extra currency can then be passed down to citizens.

With more money in hand, banks then have the ability to lower their lending rates. Interest rates throughout the economy are lowered in response to this as well, so citizens are encouraged to borrow more. The loose credit policy affects credit cards, mortgages, and business loans, among other things. Not only can lenders afford to allow lower interest rates, but they can also be more accommodating to consumers who might otherwise be denied for loans because of unstable financial situations.

In the short term, a loose credit policy can effectively stimulate an economy. More money in the hands of consumers means more buying power, and this eventually means good things for the sellers of goods as well. There is a potential drawback to this policy if it is kept in place for too long. Too much so-called "cheap money" can devalue the currency of a country. It can also lead to excess inflation if the demand for products outweighs the supply.

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