Debt

[tongodeon]

One of the smartest things that I overheard the weekend I went back to Arizona came from my youngest brother. He pointed out that a big problem with modern economies is debt and financing when it runs amok. (To be clear, in this post I am not paraphrasing what he was saying, although he gave me some food for thought and I'm running with it

Comments

[scrambledeggs]

It's struck me recently that the biggest problem with debt is that in our modern system, there's an unhealthy separation between the people who decide to lend money and the people who actually own the risk. Back in the old days, banks had a strong incentive to lend money only to people with the ability to pay it back -- e.g. if they lent money to the wrong people, they wouldn't get their money. With CDOs, mortgage-backed securities, etc., lenders lost that incentive. All of a sudden, they could lend money to people, ditch the loans for a quick payoff, and let other people worry about it long-term. And by slicing and dicing the loans, they could make it impossible for anyone without a PhD in particle physics to figure out the actual risk. Hence, no-doc loans and other insanities. I mean seriously -- why should anyone be able to get a half-million dollar loan without a paystub (or if self-employed, some damn good documentation of income

[crisper]

>what's to stop the next generation from forgetting the lesson

Nothing. There will always be another tulip bulb. I *do* think boom/bust is the natural order of free markets, in the same way that waves are the natural order of tidal action on a beach. You can stand there getting knocked over and drowning, or you can become a competent swimmer. You can learn to surf, but even a surfer eventually falls off the wave; they just have to learn how to do so in a way that doesn't break their neck.

And even with all of that, sometimes there's a roller you can't do anything about and it's going to smash you. Even champion surfers and swimmers get their necks broken or drown.

[ctd]

With careful central planning, though, the boom part can be completely eliminated!

Well Regulated Markets....

[drieuxster]

You might want to make sure that you qualify WHICH types of 'regulated markets', since the current mythos is that the excess regulation of the market is the cause of the current crisis!

The moment that the FASBy rules that one can say that an asset is worth anything one wants it to be worth - then one has skipped through the regulated market system into the Fantasy Island Regulatory Oversight....

Re: Well Regulated Markets....

[drieuxster]

yes... and that flaw was the utter lack of faith in the Purity Of Essence