"By "loan demand", we usually mean the demand
from households and corporations for the credit provided by banks. But actually
this makes no sense. What households and corporations actually want is not
loans. It is money.
Households that have
money generally do not borrow. They buy their houses, cars, yachts, holidays to Bermuda with money they
already have. It is households that DON'T have money that borrow. They do so in
order to buy the houses, cars, holidays to Ibiza (perhaps not yachts so much)
that they don't have the money to afford. They would really like to buy these
things from money they already have, but there isn't enough of it right now,
and in the case of houses there won't be for at least 25 years even if they
save assiduously. They do not "want" loans. They want money."
"Loan assets are claims on the future income of households, corporations
and governments. Lending is always a bit of a gamble: future income is by
definition uncertain. Default happens when income in reality does not match the
expectations against which the loan was advanced. The interest payments on a
loan are both compensation for the opportunity cost to the lender of not using
the money (although in the case of banks which create money when they lend, the
existence of this opportunity cost is debateable) and, more importantly, a
consideration or surety against possible future default. The higher the
likelihood of future default, the higher the interest payments."
