My post yesterday about why we had a financial crisis and what to do about it suggested this:
Second… Dig no further.
Adding debt to an already bubble popping amount of debt service can’t help. But we’ve done just that for the last year. Politicians spent and prayed. Economists in their service, prayed. Stop digging!
Some may ask why not more debt? It worked to get us out of the ‘92 recession, and the 80 recession? And we have lived prosperously for a century using that method – why switch?
Short answer… because a debt Ponzi scheme is still a Ponzi scheme and it must, and will, come crashing down.
Long answer… I’m not advocating getting rid of debt. I advocate getting rid of crazy debt, which I define as debt used to finance unproductive, speculative ventures. For example, if I borrow money to finance expanding a factory, that is productive. If I borrow money to buy a piece of property I believe will rise in value, that is not productive. I’m not adding value, I’m just possessing.
Debt fueled productivity raises net GNP (GNP minus debt). If you view net GNP, ultimately, as what we use to pay down debt, then for the system to not crash you have to rise GNP faster than debt service. And we didn’t. And it came crashing down.
So debt isn’t the problem – crazy, speculative, debt is.
Get rid of it and we have a fine system that will provide wealth long into the future.
December 17th, 2009 at 5:22 pm
“if I borrow money to finance expanding a factory, that is productive”. Oh really? Are you assuming a certainty that the factory’s production will be profitable? At what level of uncertainty would you declare such a loan unproductive and thus ban it (further assuming that you could write a workable law to do so)? Would you approve a loan for a US factory that would add to an already worldwide over-capacity in that factory’s product? Sounds like you want to build a government regulatory scheme with tentacles in everybody’s business. Who would decide what was too speculative?
Suppose your company wanted to borrow a noticeable amount to pay a tax bill during a low cash period when there might be doubt about your viability as a young going concern. You shop around and find a lender willing to take a chance for an appropriately higher interest rate. To whom would the lender apply for approval and what would be the agency’s criteria for approval?
Converting fine-sounding ideas into practicable policy is harder than you apparently imagine. Especially if you also have a goal to dramatically shrink government.
December 17th, 2009 at 5:54 pm
Why complicate it? I’m not saying we have to ensure productive loans – we can’t predict that. What should be done _instead_ is NOT SUBSIDIZE the loans. Most of the crazy debt is government backed / subsidized. Do not provide a safety net, do not provide a subsidy and the market will very quickly eliminate unproductive loans.
But you know this… how about commenting on ways to make ideas work.
December 17th, 2009 at 9:54 pm
“pay a tax bill during a low cash period ” ! There’s the problem, too many taxes on business regardless of profit level. Looks just like “sell bonds for operating costs” or “raise wages and let contracts before revenue projections are known”.
December 24th, 2009 at 2:17 pm
There is obviously a lot to know about this. I think you made some good points .