5 ms·

Why is it legal for corporations to build financial houses of cards like that?

xyzzyz 7y ago
For the exact same reason why it’s legal for individuals to take 30 year mortgages. Would you prefer world where you first need to save up for decades before being able to stop renting? It’s the same with businesses: they take loans, because they allow them to make money now, and it works just fine in normal times without an actual pandemic and forced lockdown of everything.
- jkhdigital 7y ago
  Except that people didn't have to save for decades to afford houses before the advent of the 30-year mortgage. Debt is risky, period. Someone has to pay for that risk when bad things happen and the debt cannot be repaid. Also, people respond to incentives. When individuals and companies are allowed to keep all the profits from their risky activities, but are shielded in whole or in part from the losses, they will respond by taking on more risk than they would otherwise. It's called moral hazard. Some of this is inevitable, and desirable--risk-taking is the driver of all economic progress. But how much? How far do we take it? Are we actually creating a society worth living in when the "risk-takers" are all rich multinational corporations?
  - xyzzyz 7y ago
    > Except that people didn't have to save for decades to afford houses before the advent of the 30-year mortgage. There is a certain truth in that the ballooning housing prices in many places have a lot to do with availability of credit to the buyers. At the same time, if you're planning to build a new house, you'll find that the costs of building itself are also high. Quite simply, building requires lots of labor, and labor today is much more expensive than it used to be in the old days. To build a house under modern standards and code, you're going to spend at least $200k, probably more. It definitely will take a decade if not two before a typical American family can save up as much, especially while making rent payments at the same time. > Some of this is inevitable, and desirable--risk-taking is the driver of all economic progress. But how much? How far do we take it? Are we actually creating a society worth living in when the "risk-takers" are all rich multinational corporations? In truth, the real risk-takers are millions of regular people, who don't build any significant savings to weather the storm. I find it strange to complain about moral hazard of government or Fed bailing out businesses by loaning them money, when at the same time individual people are given various kinds of unemployment insurance, child benefits, subsidized housing etc. These might be right thing to do, but they create even bigger moral hazard, and it should be recognized before complaining about businesses getting some government support. Can you imagine government instituting a "loss of profits insurance" program, where every business must pay in some percentage of profits, and which will pay out replacement of profit should something happen, the same way unemployment insurance works? Or a program where government simply gives cash to businesses that are owned or employ people government decides are worthy of support, the same way child benefits work?
    - icelancer 7y ago
      People also pay for unemployment insurance and the other things you mention through taxation. The moral hazard you are deftly sidestepping is the fact that bonds/loans do not operate the same way for an individual with collateralized debt vs. a large corporation. And thus, a large corporation can - and does, occasionally - act in accordance with those incentives by assuming bailouts are coming after a black swan event.
- icelancer 7y ago
  Huh? If I default on my mortgage due to this pandemic, the loan is collateralized and the house is seized / a lien is put on it. Why, then, do corporations get to avoid their collateralized downfall?
  - xyzzyz 7y ago
    The government can require collateral, or equity with liquidation preferences, that's totally fine by me. I thought the issue raised by parent poster was why companies require so much debt for their operations, and the answer is, of course, that it makes perfect sense in most scenarios other than global pandemic and shutdown of everything.
    - chii 7y ago
      > it makes perfect sense it makes financial-risk/reward sense. But only because interest rates are at record lows, and there's evidence in the past that bailouts can happen for too-big-to-fail type companies. Essentially, these big employers can extort a country for a bailout, with the economy tanking as the weapon. If they cannot rely on the interest being low, and if they cannot rely on a lender of last resort like the FEDs, i'm sure they will be more fiscally responsible. Unfortunately, these risky behaviour these companies take are the result of years of poor monetary policy by the FEDs and lack of investment into increasing competition in all sectors of industry by the gov't.

For the exact same reason why it’s legal for individuals to take 30 year mortgages. Would you prefer world where you first need to save up for decades before being able to stop renting? It’s the same with businesses: they take loans, because they allow them to make money now, and it works just fine in normal times without an actual pandemic and forced lockdown of everything.

jkhdigital 7y ago
Except that people didn't have to save for decades to afford houses before the advent of the 30-year mortgage. Debt is risky, period. Someone has to pay for that risk when bad things happen and the debt cannot be repaid. Also, people respond to incentives. When individuals and companies are allowed to keep all the profits from their risky activities, but are shielded in whole or in part from the losses, they will respond by taking on more risk than they would otherwise. It's called moral hazard. Some of this is inevitable, and desirable--risk-taking is the driver of all economic progress. But how much? How far do we take it? Are we actually creating a society worth living in when the "risk-takers" are all rich multinational corporations?
- xyzzyz 7y ago
  > Except that people didn't have to save for decades to afford houses before the advent of the 30-year mortgage. There is a certain truth in that the ballooning housing prices in many places have a lot to do with availability of credit to the buyers. At the same time, if you're planning to build a new house, you'll find that the costs of building itself are also high. Quite simply, building requires lots of labor, and labor today is much more expensive than it used to be in the old days. To build a house under modern standards and code, you're going to spend at least $200k, probably more. It definitely will take a decade if not two before a typical American family can save up as much, especially while making rent payments at the same time. > Some of this is inevitable, and desirable--risk-taking is the driver of all economic progress. But how much? How far do we take it? Are we actually creating a society worth living in when the "risk-takers" are all rich multinational corporations? In truth, the real risk-takers are millions of regular people, who don't build any significant savings to weather the storm. I find it strange to complain about moral hazard of government or Fed bailing out businesses by loaning them money, when at the same time individual people are given various kinds of unemployment insurance, child benefits, subsidized housing etc. These might be right thing to do, but they create even bigger moral hazard, and it should be recognized before complaining about businesses getting some government support. Can you imagine government instituting a "loss of profits insurance" program, where every business must pay in some percentage of profits, and which will pay out replacement of profit should something happen, the same way unemployment insurance works? Or a program where government simply gives cash to businesses that are owned or employ people government decides are worthy of support, the same way child benefits work?
  - icelancer 7y ago
    People also pay for unemployment insurance and the other things you mention through taxation. The moral hazard you are deftly sidestepping is the fact that bonds/loans do not operate the same way for an individual with collateralized debt vs. a large corporation. And thus, a large corporation can - and does, occasionally - act in accordance with those incentives by assuming bailouts are coming after a black swan event.
icelancer 7y ago
Huh? If I default on my mortgage due to this pandemic, the loan is collateralized and the house is seized / a lien is put on it. Why, then, do corporations get to avoid their collateralized downfall?
- xyzzyz 7y ago
  The government can require collateral, or equity with liquidation preferences, that's totally fine by me. I thought the issue raised by parent poster was why companies require so much debt for their operations, and the answer is, of course, that it makes perfect sense in most scenarios other than global pandemic and shutdown of everything.
  - chii 7y ago
    > it makes perfect sense it makes financial-risk/reward sense. But only because interest rates are at record lows, and there's evidence in the past that bailouts can happen for too-big-to-fail type companies. Essentially, these big employers can extort a country for a bailout, with the economy tanking as the weapon. If they cannot rely on the interest being low, and if they cannot rely on a lender of last resort like the FEDs, i'm sure they will be more fiscally responsible. Unfortunately, these risky behaviour these companies take are the result of years of poor monetary policy by the FEDs and lack of investment into increasing competition in all sectors of industry by the gov't.