Taxes also effectively perform the same function - destroying money (consider what would happen if all current tax money were burned and all government spending were printed - economically no different).
This side of the equation doesn't get a commensurate level of attention.
That requires the creation of additional money, borrowed into existence by someone else and then earned by the interest payer, in a never ending exponential cycle.
credit is only problematic when the expected activity fails to come to fruition, which is why the credit shrinkage acutely accompanied the economic shrinkage in the last crisis.
It’s the creation of money and paying interest that’s problematic.
This interest demands new money to be brought into being to pay it — to someone doing nothing but seeking rents due a monopoly position bestowed by the government; the banks.
This stream of interest payments is going out of the economy to whomever owns the commercial bank, but must be paid by people within the economy, who must borrow more money into existence to pay it — from the very people to whom it is “owed” (for no reason at all; they bear no risk, and provided no capital of their own).
how does the existence of loan defaults jive with the idea that loans have no risk?
If the money creation aspect of banking was separated from the capital accumulation and loan-making/risk-taking aspect, things should unfold much differently. Particularly since there would be "fractional reserve" concept underpinning the money supply.