patrick.net

I would say for the large majority of Americans, debt is essentially a bad thing.

Savers don’t constitute the majority of political constituents.

Nice nutshell argument.

I look in the mirror and see what appears to be a normal person, but without debt how can that be?

Without debt any free market system will be doomed to cash-flow driven bust/boom cycles. It is essential to the function of a free market capital market system. Debt is as old as agriculture itself.

I also don't agree that debt is bad for the average American consumer. I would revise that to *revolving credit* is bad for the average American consumer. Debt enabled people from meager means such as I to attend University without being able to pay for it on the belief that I would be able to pay for it at a later date. Debt enabled me to buy a car after getting that first job, so I could go to work and earn the money to pay those debts back. I could have just directed my life without using any debt, but I would have been far less productive or successful without it.

When people bought homes with amortizing mortgages where they were expected to always be paying off that debt, that was a benefit to most of those people.

I know this will really rub some wrong, but theoretically debt and equity are only separated by (1) tax position, (2) order of residual claim on assets, and (3) legal implications of distress risks.

Modigliani-Miller theorem.

The difference between debt and equity is which way the interest flows: away from me or toward me.

Debt enabled people from meager means such as I to attend University without being able to pay for it on the belief that I would be able to pay for it at a later date.

Debt did not really "enable" you (or me) to go to college, it just enabled us to overpay for it. I would say our brains and hard work had a little more to do with academic success. And we *did* pay for it, probably twice over by the time we rapaid our loans. Federally guaranteed (and nondishargeable) student loans are probably the major reason why college costs are so high today, and have consistently risen faster than background inflation over the past 40 years.

Debt enabled me to buy a car after getting that first job, so I could go to work and earn the money to pay those debts back.

Kind of a self-perpetuating treadmill, isn't this? Why do I need a car? So I can get a job. Why do I need a job? So I can pay for my car. Simplistic reduction? Maybe, but still fundamentally true.

If we want to truly "help" low-income college students, why not just directly subsidize the costs through grants and scholarships? Better than saddling them with career-choice stunting and soul-crushing debt when they're just starting out in life.

Or... even better: fund low-cost public universities and community colleges that can provide the same high quality education at a much lower price than Ivy League private schools? (supply-side solution)

Or... de-stigmatize trade school as being only for "stupid" people and drop-outs. Does every Amercian really *need* a university education to perform the average adult job? Do we as a nation really *need* more lawyers, philosophy/poly-sci majors, and 'diversity' education counselors? Or might having more engineers, scientists and skilled tradesmen be to our benefit?

I don't disagree, but that argument could go on forever, so it's more philosophical than theoretical.

When I went to school, mid 80s-90, costs weren't all that out of control yet. Only towards the end were they starting to spike. I don't think student loans were at all a bad deal back then. They enabled lots of people to rise socioeconomically who wouldn't have been able to otherwise. You can always write off such mobility as a treadmill, but so be it. It's a treadmill which people have sacrificed their lives and moved across oceans for the past couple centuries upon which to tread. I call it capitalistic opportunity.

The difference between debt and equity is which way the interest flows: away from me or toward me.

Equity has no interest. It may pay dividends or appreciate in value, but there is no interest except but for interest-avoided.

People have no equity. You cannot ever issue equity as an individual. Your home "equity" is not equity at all. It is savings from your perspective.

Randy,

I don't completely agree that creative new forms of indebtedness is really what got us here and built this country. Debt/credit markets played a role, sure. But at the end of the day (as you may have pointed out in a previous thread ?), productivity gains through technological innovation is what really drives economic and social progress.

Being able to quickly access/transfer/invest my money electronically anywhere in the world = good innovation.

Being able to grossly overbid on a McCrapshack in Manteca using a neg-am NINJA = not-so-good innovation.

HARM

We probably agree completely that debt abuse is always bad. And the hyping of debt abuse is unpardonable. Those types of home "loans" are really just big fat payday loans or flaky credit cards loosely tied to occupying a house.

This is from the Amazon summary of The Mystery of Capital by Hernando de Soto:
The real problem is that such countries have yet to establish and normalize the invisible network of laws that turns assets from "dead" into "liquid" capital. In the West, standardized laws allow us to mortgage a house to raise money for a new venture, permit the worth of a company to be broken up into so many publicly tradable stocks, and make it possible to govern and appraise property with agreed-upon rules that hold across neighborhoods, towns, or regions. This invisible infrastructure of "asset management"--so taken for granted in the West, even though it has only fully existed in the United States for the past 100 years--is the missing ingredient to success with capitalism, insists de Soto. But even though that link is primarily a legal one, he argues that the process of making it a normalized component of a society is more a political--or attitude-changing--challenge than anything else.
I do have to admit that the housing bubble/mortgage mess could be a missing appendix titled "The Market Gone Bad: The Misallocation of Capital". That said, I don't want to go back to living in caves (and I'm a peak oiler). I'd rather be able to try and fail than not allowed to try at all.

I’d rather be able to try and fail than not allowed to try at all.

"Capitalism without failure is the worst form of socialism."
--Peter P

I am assuming that we are talking about "debt for consumption". Yes, taking on debt to buy fancy cloths for example can very rarely be good.

But what about say - taking on debt to finance a company that eventually becomes profitable and can pay off debt ? Raising money via selling equity is not always the best option.

I’d rather be able to try and fail than not allowed to try at all.

“Capitalism without failure is the worst form of socia1ism.”
–Peter P

Even consumption debt isn't all that bad. If I don't have the patience to wait so i can save up for that nose job and I want to charge it, what's the harm? As long as I don't go into consumption debt for stupid amounts relative to my (conservatively estimated) income, it's no biggy.

So many Cali boomers are in trouble 'cause they overdid it - not with nose jobs and trips to Italy, but on the one major expense of any plebeian: the "home". In fact they overdid it to such a ridiculous extent, that financially well off people (like Randy, FAB, Patrick and others here), choose to be renters! It's a phenomenon probably never before seen to such an extent. Even the NYT noticed.

In summary, even though we may feel good bitching about each other's toys and vacations, it aint the +$50K-70K on said items which are killing us. It's the $500K+ on the house. And so there's no reason to get all riled up about debt in general - the part of this mess which matters, the part which makes stupid Fed tricks necessary, is the mortgage mess. And that never would've happened to anywhere near such a degree if the regulators hadn't looked the other way so much, allowing so many 3/1, 5/1 IO etc etc. That's what made sane people realize they had to pull back, or they'd be competing with those willing to commit financial suicide. It wasn't the mortgage interest deduction or any other item mentioned by the threadmaster.

And now it's too late to do anything other than wait for the stupid Fed tricks to run their course. Damn the stickiness!

In a way, debt is like a firearm. It's just a tool. Trained properly and with appropriate respect it can be a real lifesaver. Credit doesn't ruin people; people ruin people.

The US government is not actually encouraging debt. It's regulations and policies are set up to encourage investment, spending, commerce, and growth.

The large financial interests which manipulate policy and regulations to their own dubious ends are responsible. The US government is simply a proxy for big business.

A great many good people working within government are fighting the good fight against these interests, but the fight is hardly a fair one. Outcomes are comprises.

Term limits and campaign finance reform would level the playing field dramatically. Its unfortunate every significant effort in this area ends up dead on arrival. The public has to hold the elected's feet to the fire on this, until that is achieved real change is not possible.

And of course, should these reforms ever be implemented, it will spawn a new round of corruption and influence via other means. Which will demand another new round of regulation. The game must go on.

If debt is such a good thing, why is there a penalty for obtaining it (interest)?

OT early apologies, from front page of today's WaPost.

21% "Surge" in burglaries in Washington DC, and police pointing finger at the economy!

That Oakland contagion will eventually spread to bay proper, should be a nice accelerator on the downslope. :-) Nothing like a little rape and pillaging outside of the $2M Palo Alto box to widen those cracks in the fortress walls. A few sushi restaurant takeovers Pulp Fiction style will change the PTA meeting conversations.

Excerpt below from Washington Post:

Burglaries are on the rise in the District, with police blaming the souring economy as a contributing factor in a 21 percent increase in break-ins over the same period last year.

Police data show that 922 burglaries were reported in the city in the first quarter of the year, compared with 761 in the same span last year. The biggest increases have been reported on Capitol Hill and in neighborhoods east of the Anacostia River, including Congress Heights.

If debt is such a good thing, why is there a penalty for obtaining it (interest)?

Because you don't understand what "interest" is. It is not a penalty. It is a forward prediction about the time value of money in the context of risks and inflation.

If debt is such a good thing, why is there a penalty for obtaining it (interest)?

Consider a close analogy:

If a house is such a good thing, why is there a penalty for obtaining it (rent)?

I withdraw my question. The phrasing was horrible.

Quit bashing the government. Your all unpatriotic!

I told you guys this last summer and I will say it again: governent does not care about renters who wan tlowe rhouse prices. You can keep starting these thrads complaining about high house prices and bail outs until you are blue in the face, and it won't make a darn difference. All 3 presidential candidates support bail outs, so you have absolutely no chance of succeeeding in your agenda.

Alpine
just because they say they support something doesn't mean they actually understand that support the same way you do.

easy example: Barry and Hillary both claim to be against NAFTA. Do you think either of them is about to re-negotiate any of it?
Another one: the current prez says he wants to fight global warming. Do you see Al Gore jumping up and down with joy?

Regardin articles in the media advocating lower house prices, here's one from a major monthly.

http://tnr.com/politics/story.html?id=2da0e8b4-78f3-47ce-8e76-91931b677e9c&p=1

A sample paragraph:

"Those who support government intervention maintain that falling home prices are a danger. But a danger to whom? Falling prices would allow new buyers to purchase homes they could genuinely afford, and existing borrowers who are able to make payments would continue to build equity in their homes. People would also have less incentive to frequently flip from one home to another, and thus they would deepen and lengthen their ties and obligations to their communities. Falling prices might even allow a return to the increasingly rare single-income household, thus allowing one parent to tend to the needs of the family's children. Besides which, in our drive to spur home ownership, we have stigmatized renting. Renting has real economic value--especially for that portion of the workforce that needs to remain mobile in order to find employment--yet investment in rental properties has been minimal for decades.

Oh finally ! A housing bull has arrived at Patrick.net !! Alpine the Realist, the (in)famous Zillow poster wants to irritate the Patrick.netizens.

You are right, Alpine, the Govt does not care about renters. The problem is, it does not care even about loanowners. Kindly explain to us how the bailout is helping any sort of common man - renter or loanowners ?

Did you benefit from the Bear Sterns bailout ? Are they specifically marking the tax paid by homedebtors and NOT using them for bailouts ?

The unfortunate and sad reality is, the housing bubble and and its aftermath is not going to help anyone except a very small circle. Neither the debtors nor the renters are going to benefit from it.

Because you don’t understand what “interest” is. It is not a penalty. It is a forward prediction about the time value of money in the context of risks and inflation.

In a sense, our interest-based economy not only "predicts" inflation, it also *ensures* it. Without an ever-expanding balloon of credit (and money supply), the economy cannot "grow". Debt that actually gets paid off is considered "bad" in our system because it reduces the money supply (fractional reserve's money multiplier in reverse).

Default risk, OTH, is something that could easily be addressed through collateral alone. Anyone remember the days of 20% down? Not too many "YouWalkAway.com"ers back then, unless there was a true catastrophe (Depression).

I have to admit, I'm starting to seriously wonder why it is that we assume that very long-term interest-based financing is the *only* way to make large purchases, such as a house. What did people do before the 30-year mortgage (~60 years ago), or before modern mortgages period? How about pay-as-you-go D-I-Y (strawbale, cordwood or kit houses), or some other type of installment plan lending? You make interest-free installment payments on principal alone, and the bank/lender gets to share in any profits when you eventually sell. Sort of like Islamic banking, or contractum trinius in old Europe.

Being in debt is bad. That is my personal finance opinion. People might disagree.

However, I am even more convinced that debt is not wealth. It is definitely not money. Especially in a fractional reserve system where leverage "creates" more money to lend as debt and that debt is counted as more wealth to leverage further and so on.

Well, let's see. If someone has an ARM that is about to re-set, and the government forces the bank to freeze it for 5 years, that helps them. I have a fixed rate loan, but the bail out benefits me as it prevents foreclosures and keeps houses off the market. And I also live right outside of NYC, so I would imagine that the Bear Stearns bailout would have some sort of affect on the housing market here... although it was probabaly very small.

Because sharing in profits on principal for complex services would be terribly inefficient and worse than just paying for the capital you borrowed.

Equity and debt aren't that different. If you float equity, someone "lends" you money for one set of rights. If you take debt someone lends you money for a different set of rights. The debt holder gets to take back assets if you fail, but they also risk you paying off the loan and being free of them without their having any say in the matter. The equity owner gets to benefit from appreciation of your assets, but suffers if they drop in value. He also gets nuthin if you fail (in 99.9% of cases). But he holds a handcuff over the guy who issued him the equity, because he doesn't ever have to sell (for normal equity), and can command whatever price he sees fit if you ever wish to be free of him.

I can buy back my debt at a known cost. That is worth something quantifiable. I cannot buy back my equity at a known cost. Ask any small company which took a ton of equity to launch, but then becomes mildly cash-flow positive with a nice, happy but slow growth rate whether they'd rather have taken debt instead of floating equity. They are slaves to their equity masters.

I'd much rather buy a large asset using debt. Always. Sure, I'd rather have enough cash in reserve to pay it off on-demand. But that is a separate issue as to whether debt is "bad" or not in its own right. Just imagine how f'd up house prices would be if instead banks used the methods of those guys (who I won't advertise) in SF that "buy shares" in your home ie., true equity. I have every reason to believe that would be 5x worse than the debt fiasco.

They are slaves to their equity masters.

Randy,

Do retail stockholders really hold the reigns of power over publicly traded companies today? Seems to be the exact opposite, given excessive CEO compensation.

I'm not saying there are "zero* instances where borrowing makes more sense. However, where raising large amounts of capital and spreading risk is concerned, common public stock seems a little better --or "fairer" (however you choose to define that. If the company/enterprise earns a profit, everyone gets a dividend. If it loses, everyone's stock goes down. Better than the "heads I win, tails you lose" usurious casino-style of mortgage lending we've seen over the past several years.

Of course, the house one lives in is not really an "investment", nor is it (barring some illicit uses) a "business". For the borrower, it is really a consumable and liability --and should be treated as such.

Is that really Peter Tiemann's blog, Apline? He's usually much more reasonable than to write something like "Answer to Housing Doomers Conspiracy Theories". That's just silly. Even he wouldn't say that objective financial math is a "conspiracy theory".

Man, the extremism on both sides is just going further and further and further. Before long renters will all be living-dead vampires and housing-purchase-pushers will all be a cabal of evil, enslaving alien bankers.

For some reason my previous comment got swallowed up in moderation, and I no longer have the right to approve it.

Randy,

I guess it comes down to a matter of use, as you say. Problem is, most people are willing to perpetually take on more and more debt, while banksters (gambling with OPM) seem to be perpetually willing to let them do it. The old self-limiting mechanisms of collateral (down-payments) and default/foreclosure appears to have broken down.

Down-payments, PITI and full-documentation are no longer required because lenders are gambling with OPM, and take their profits long before the borrower defaults. These same lenders contribute so heavily to Con-gress that politicians would rather take bailout money from responsible people (or borrow heavily against future taxpayers) than allow reckless lenders to fail in large numbers.

In the end, trees can't grow to the sky, and I know things will eventually sort themselves out. But, in the short run, I'm stuck between delusional, whiny FBs and powerful, moneyed lenders. So... I rent.

Americans in WashDC are not armed by law, that might be a reason for the surge. Only bad guys have weapons in DC.

Maybe the bad guys are having a surge now in anticipation of a USSC ruling against their "interests" this June in the Heller case. :) Starting in a few months, there may be a lot more dead burglars in the District.

Does anyone know ASL? What's the guy pictured above saying?

Being in debt is bad.

Debt is morally neutral.

FYI: There was an open house just down the street from me (an undisclosed location in Contra Costa) and the seller wanted $499k for a 1700sft 3Bdm 2ba townhouse in a middle income neighborhood that could rent for ~$1800 max (I just moved and personally viewed many similar rentals in this area, so am quite confident in my estimate).

This represents 278X monthly rent, or roughly 9x area median HH incomes.

We are a loooong way from the bottom in NCAL, people.

Debt is morally neutral.

Not according to the Bible or Koran. ;-)