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I wondered that too. There's widely varying opinions on how much debt is bad. Unfortunately the argument gets reduced to "debt is bad" which is frankly stupid.

by edderly 16y ago

nostrademons 16y ago
I don't really understand the confusion surrounding how much debt is bad. Debt is good when it allows you to make more money in the future than your cost of capital. It is bad when your cost of capital is higher than the amount of additional income you derive from that capital. If your cost of capital was greater than the income derived, then you lost money over the long run by taking out that debt. There's only one good in play (money), it's completely fungible, and so this should be self-evident. If it's not, it's also covered in first-year econ. Now, there's a lot of uncertainty as to whether a particular investment will yield returns greater than the cost of capital, and this is why CEOs and CFOs get paid big bucks. But the fundamentals themselves are not hard. Nor is it hard to look at $9T in federal debt, $2.5T in consumer credit, or $600K mortgages taken out by families with $30K in income and realize it's virtually impossible that the additional income generated by taking out that debt will pay for the interest on it.
- edderly 16y ago
  Ask economists how much debt is bad and you will get vastly different answers. There is genuine reason for confusion. See the arguments surrounding for example the bailout of Swedish (previously) and British banks (currently) - some consider it generically a bad idea to bailout for fear of debt generated but in the Swedish case it paid off and appears to be paying off in the British situation too. This sort of debt was useful right? But because it's a difficult question the easiest answer is to consider debt generically bad, and it is absurd at at least two levels. Firstly, one shouldn't have to describe why lending and reciprocally debt is useful. You also have to ask what else could have been done and the "all debt is bad" brigade usually waffle. Secondly, the cause of the financial crisis was "bad debts" in the form of incredibly risky securitisation schemes. Why the hell were risky loans repackaged as triple A securities. It's like making coins out of butter and bills out of sugar paper. The wailing and gnashing of teeth of how it's our own greed caused this is just a smoke screen for the way the regulation system, capitalism and the chain of involved politians let everyone down. Then people think a penance should be paid in terms of austerity - unfortunately that austerity is as likely to cause even more pain down the stretch.

I wondered that too. There's widely varying opinions on how much debt is bad. Unfortunately the argument gets reduced to "debt is bad" which is frankly stupid.

by edderly 16y ago

I wondered that too. There's widely varying opinions on how much debt is bad. Unfortunately the argument gets reduced to "debt is bad" which is frankly stupid.

nostrademons 16y ago

I don't really understand the confusion surrounding how much debt is bad. Debt is good when it allows you to make more money in the future than your cost of capital. It is bad when your cost of capital is higher than the amount of additional income you derive from that capital. If your cost of capital was greater than the income derived, then you lost money over the long run by taking out that debt. There's only one good in play (money), it's completely fungible, and so this should be self-evident. If it's not, it's also covered in first-year econ. Now, there's a lot of uncertainty as to whether a particular investment will yield returns greater than the cost of capital, and this is why CEOs and CFOs get paid big bucks. But the fundamentals themselves are not hard. Nor is it hard to look at $9T in federal debt, $2.5T in consumer credit, or $600K mortgages taken out by families with $30K in income and realize it's virtually impossible that the additional income generated by taking out that debt will pay for the interest on it.

edderly 16y ago
Ask economists how much debt is bad and you will get vastly different answers. There is genuine reason for confusion. See the arguments surrounding for example the bailout of Swedish (previously) and British banks (currently) - some consider it generically a bad idea to bailout for fear of debt generated but in the Swedish case it paid off and appears to be paying off in the British situation too. This sort of debt was useful right? But because it's a difficult question the easiest answer is to consider debt generically bad, and it is absurd at at least two levels. Firstly, one shouldn't have to describe why lending and reciprocally debt is useful. You also have to ask what else could have been done and the "all debt is bad" brigade usually waffle. Secondly, the cause of the financial crisis was "bad debts" in the form of incredibly risky securitisation schemes. Why the hell were risky loans repackaged as triple A securities. It's like making coins out of butter and bills out of sugar paper. The wailing and gnashing of teeth of how it's our own greed caused this is just a smoke screen for the way the regulation system, capitalism and the chain of involved politians let everyone down. Then people think a penance should be paid in terms of austerity - unfortunately that austerity is as likely to cause even more pain down the stretch.