Two-Tier Recovery_ Where Do You Stand_

Last week I pointed to a story in the New York Times. In that story, Floyd Norris, the author, said that we risk a two-tier recovery when we only lend to the most creditworthy companies and consumers (story link here). The most creditworthy get loans at cheap rates. The rest find it almost impossible to get loans. If there is a true two-tier recovery, where only the most creditworthy get loans, then we have a problem. I say it’s a problem because I believe that less creditworthy people should have access to credit. But they should pay a higher interest rate to compensate the bank for the risk it’s taking on. In a two-tier recovery, this second group of people would find it difficult to get a loan, even though they’re considered pretty good risks. On the other hand, I know plenty of people — including some of my readers — who would be just fine with a two-tier recovery. Credit is a privilege. Not a right. If you don’t have outstanding credit, and you represent more risk, too bad. Lending to people who aren’t good risks is what got us into our current situation in the first place.Still, even if we are in the middle of a two-tier recovery, it can’t last. Low-risk borrowers don’t generate as much interest as those who are bringing up the rear (vigorish at this end). Banks need lower-quality customers. That’s where the money is. And I am convinced that banks are addicted to this income stream. Sure, these banks are currently on the wagon, but eventually they’ll fall off. They always do. No?I’m for the traditional three-tier system. The most creditworthy get cheaper rates. The middle group pays more. And the lower-tier group — subprime — is charged even more, though I’d argue that 30%+ interest rates are way too high.Where do you stand? Should only the most creditworthy have access to loans? Should everyone else be locked out? Do you think that subprime customers should be denied access to capital? Should only the first two tiers in my three-tier system have access while the third is excluded? I’d be interested in hearing your thoughts.