You need only hear the ridiculous term "predatory lending" to realize that many Americans don't truly understand what credit is, or how it functions. People will often talk about "needing" credit. But need has nothing to do with how credit is granted. In fact, quite the opposite.

Credit, whether a car loan, a mortgage loan, or a credit card, is simply an agreement whereby someone gives you their money and you agree to pay it back within a certain period of time. The lender charges interest for providing the service, and to make a profit for putting their capital at risk by investing in you (hint: that's why we call it "capitalism").

Now, here's the part most people don't understand - the RATE of interest is based on the PROBABILITY THAT THE BORROWER WILL REPAY THE LOAN ON TIME. The higher the risk, the higher the rate.

The reason that Warren Buffet can borrow money at a lower rate than you or I could is not that he has an "in" with the banker - it is because he is simply far more likely to repay the loan than you or I are. He's a lower risk. And risk is what credit is all about.

Managing this risk is done in a variety of ways. "Secured" credit (such as a car or house loan) uses the value of some tangible asset (collateral) to increase the probability that the borrower will repay, by allowing the lender to "foreclose" on the asset if they don't. This results in a lower rate of interest.

Note also that the greater the value of the collateral, the lower the rate - thus a home loan where you make a down payment of 20% or more will have a much more attractive rate than one where you put down 10% or even less. Again, the more collateral the lender has as security, the less risk, and the lower the interest rate.

An unsecured line of credit (like a credit card) will always have a far higher interest rate than a secured loan. The lender has no assets to recover, and the borrower, who has no assets to lose, is far more likely to walk away from the debt (and the historical record proves this to be true).

Another aspect of managing risk is the historical data on the borrower. If you earn an income that would give you the means to pay back the amount of money you've borrowed, and you have a solid history of making your payments on time, then your interest rate will be lower than someone with a past filled with late payments, foreclosures, or bankruptcy. Such people may not even be able to obtain any credit at all.

Thus a person (or business) borrowing money with a high amount of collateral, a verifiable income, and an excellent record of repaying debt, will always get better terms than someone with little or no collateral, no verifiable income, and a bad credit history.

The current "credit crisis" is due to numerous violations of these simple rules, some of them actually mandated by well-meaning but financially illiterate members of Congress. The "anti-redlining" laws come to mind - the government in essence forced lenders to abandon their risk management strategies in order to increase "affordable housing" (another oxymoron). Worse, much of this legislation was the result of special interest pressure groups (a.k.a. "community organizers") in poor neighborhoods who view home ownership as a "right."

Now, I'm not letting the Federal Reserve off the hook either- interest rates down in the 4% range may have made mortgage loans more "affordable" but they also made it harder for lenders to earn enough to make an adequate return on their money. The response was to make more risky loans (like Adjustable Rate Mortgage loans, "balloon" loans, and others) which allowed a lower initial payment, but yielded a somewhat higher return over the long term (by raising rates later).

The results should have been predictable - more people with marginal credit borrowing more than they could afford, with a huge increase in risk. And it didn't take that long for the inevitable to happen - a dip in housing prices (which would have little impact on a market where most homes were bought with substantial down payments) suddenly wiped out the equity in many of the homes bought with little or no down payment.

Oh, and about that term "predatory lending" - it is an oxymoron, unless you believe that we have lenders skulking around street corners, whispering "Pssst! Hey buddy, I've got $200,000 in this briefcase, and you'd better take it, or else!"

Predatory lending is a term invented by elitist liberals who, as usual, see everyone but themselves as victims, too stupid to know what's best for them, and thus being "taken advantage of" by Snydly Whiplash and his cohorts (and needing, naturally, more big government "oversight" to protect them).

Now, government regulation has a role - if a lender charges a higher rate than was agreed to in the contract, or otherwise violates the agreement, then that's fraud, and dealing with fraud is indeed a proper use of government power. But we have gone long past that, to the point that we are attempting to protect people from their own stupidity.

I'm sorry, but if you are too lazy to read the fine print on a contract to borrow hundreds of thousands of dollars, I have no sympathy for you. If you really are, as liberals believe, too stupid to figure out that running a $7000 balance on your credit card is a bad idea, then don't look to the rest of us to bail you out.

From the corrupt government officials like Chris Dodd and Barney Frank to the flagrantly unethical (and perhaps illegal) bureaucrats at Fannie May and Freddie Mac, there is plenty of bad behavior to decry.

But at the end of the day, you and I are responsible for our debts. We either pay them, or suffer the consequences - we have no right to demand that our fellow taxpayers foot the bill.