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It’s common to hear agents, reporters and consumers complain that the housing market is being hurt because “credit is too tight.” They make it sound like banks are being stingy, when in fact, credit isn’t something the banks provide at all. Here’s why.

Let’s start with a typical misunderstanding about credit. These days, people equate “having credit” with their “credit line.” The more credit cards, drawing accounts or blank checks they have, the more credit they assume for themselves. This belies a fundamental confusion about where credit comes from. It makes it seem like credit is something a bank issues to you when it provides you a credit card or a loan.

In fact, that’s not credit at all. That’s merely a form of accessing capital from a creditor.

As the brilliant American economist Henry Hazlitt explained in his book in One Lesson (1946):

There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit on the contrary, is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan. The banker is not giving something for nothing. He feels assured of repayment. He is merely exchanging a more liquid form of asset or credit for a less liquid form. Sometimes he makes a mistake, and then it is not only the banker who suffers, but the whole community; for values which were supposed to be produced by the lender are not produced and resources are wasted. [Emphasis added.]

Keeping in mind that Hazlitt also rightly pointed out that all credit is debt, the error of assuming that today’s housing market is being held back by the witholding of further debt to consumers seems outright silly.

Without rehashing the muddied and polemical waters of “who caused the ” any honest observer will note that many banks have taken an significant beating on housing these days. We can run the numbers: foreclosures, strategic defaulters (who border on thieves when they do not evacuate the home promptly) and general economic malaise are hurting banks, who are businesses like all others, just as much as they are hurting real estate professionals, builders and housing-related industries. Remember that banks exist to lend money, earn interest and make a profit. Nothing would make them happier than to lend at a profit.

So why does there still seem to be a dearth of mortgage lending? Because there’ s a dearth of credit on the part of consumers, not banks. There certainly isn’t a lack of money, considering the Federal Reserve has more than doubled our money supply in the past five years. Nor is there a lack of investors, especially foreign investors who are using cash, not credit to take advantage of low inventory prices.

The credit crisis, therefore, is a lack of credit worthiness, not lending activity.

What makes for a lack of credit worthiness? It’s called a recession. Unemployment has remained over 9% for more than three years; that increases the risk that borrowers can not repay their debts. Wages have stagnated and fallen for nearly every sector. Real inflation (not government propaganda numbers) is rising at the supermarket, gas pump and home energy bill. Producer price indices are rising to decade-highs. And consumers, especially amongst typical home buyer segments, are still highly leveraged. The balance sheet of a college graduate today starts out typically $20,000 in tuition debt.

He is simply not credit worthy.

Ironically, many of the same people who blamed the banks for creating a housing bubble, then a housing crash, by being too liberal with credit lines and lending are now griping that the banks have become overcautious. This assumes bankers do not learn from their mistakes, and are merely automatons slaved to consumers’ whims and demands. In fact, bankers, like other businesses, need to make a profit. They need to make sound investments in credit worthy . During a recession, that’s simply not the housing market.

And it’s certainly not done by extending more debt to un-credit-worthy borrowers.

How do we improve consumers’ credit, then? Half unemployment. Lower inflation. Decrease monthly consumption costs. Reduce taxation on savings and assets, to help consumers build convertible equity. Lower public debt (for which consumers are as liable as they are personal debt). It’s not rocket science, just like sound lending isn’t a magic formula. In the meantime, the housing industry might like to consider alternate ways to “sell” housing to consumers. Taking out a mortgage isn’t the only way to help people engage the American dream. It’s just been the cheapest way for nearly a century.