Even planned economies can encounter trouble with lending and defaults. Such has been the case with China over the last year or so. A regulatory crackdown on connected lending and less than above board tactics has been ongoing as well. Now there is the promise that credit availability will expand, but in accordance with regulatory wishes (Bloomberg article).

What seems to be missing here is the understanding by regulates that is was already a planned economy. There were already rules in place. Rules that were not followed, at least in spirit. Call it innovation, entrepreneurship, illegal behavior, but the more you attempt to plan and dictate how an economy grows, the more you see the less than preferred activity take place. Why? At some level it is simply a matter of returns. The returns to the unwanted activity are higher and therefore institutions pursue them with vigor.

At that point it becomes a benefit-cost calculation. When the excess returns from other activities outweigh the returns you make and any penalties if you are caught, profit seeking behavior takes hold. Now I do not want to seem to be bashing China here. We see this kind of behavior in the U.S. and other “free market” economies as well. The lesson that nobody seems to learn is that there are limits to the regulatory oversight and freedom and unless all other activities are prohibitively penalized then there will be those that take the road less travelled, or at least the road less legal.

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