5 ms·

I find the whole idea of borrowing money for investment purposes a little strange. Isn't that basically just gambling?

fijal 14y ago
It's a gamble along the lines of "I bet I can invest money better than the bank". Often turns out the bank can invest money better. I wonder who convinced them to invest, er, gamble.
- fusiongyro 14y ago
  In the short term I'm sure it's true. But in the long term, banks have a major advantage over us mortals: they get bailed out. So I'd imagine they tend to win in the end.
- EliRivers 14y ago
  If the bank's so smart at investing, why did they give the money to someone who was going to lose it all on the stockmarket? :)
  - ptaipale 14y ago
    Because the borrower had good collateral, and this was good business for the bank. It is what banks are supposed to do. Bottom line: I think this is not a good case why you need more regulation of banks. It may be a case why you need more regulation of universities.
    - Gormo 14y ago
      Before we discuss more regulation of either banks or universities, perhaps we should first consider the extent to which we need more regulation of regulation.
      - ptaipale 14y ago
        Indeed. That is perhaps the first priority. Too often the approach "this didn't work out, so we need more of it".
reeses 14y ago
It's just debt arbitrage. The problem is that they were not sufficiently sophisticated (i.e., they were ignorant about how the game was rigged, the house was built on an old cemetery, or that they were walking through the part of town with the highest violent crime rate) to profit in an extremely hazardous environment. I won't get into the "providing liquidity" or "it's just moving money around" arguments (feel free, though), but it's not significantly different from taking out a loan or accepting funding for a start-up. In most cases, you are accepting more financial risk than you can afford to pay in the belief that you can leverage that capital to generate a profit above the principal and interest. While in come cases it can be very much like gambling, that also covers "games" where skill can influence the outcome. For example, slot machines in a Russian casino are probably not the best risk. However, if you're a good poker player, you can do quite well in private games.
arethuza 14y ago
Of all the possible reasons for borrowing money I would have thought that investment is by far the best!
namdnay 14y ago
You could argue that this is exactly what you're doing when you buy a house. You're more or less borrowing money to invest it in real estate. I think the problem is borrowing money for risky purposes (which btw seems to be the scenario for about 50% of gangster related movies)
- icebraining 14y ago
  It's only the same if you buy the house purely to re-sell it later. Most people live in the houses they buy, so they extract value out of it that a bank wouldn't, even if they don't earn more when they sell it.
roel_v 14y ago
No, it isn't. People across the world make billions (combined) every week doing just that. From Fortune 500 LBO's over leveraging assets to finance real estate portfolio expansion (despite what you read in the papers, there are still many profitable ways of doing this) to bank loans for starting small businesses - it's all about risk management and entrepreneurs having better access to information on profitable opportunities than those with capital (often, banks, but also angel investors). I'm a bit fed up with the 'finance = gambling' fallacy - there is a spectrum of risk profiles, and money can be made in arbitraging this risk, without it being 'gambling' (which is, by definition, risking money on a 100% or near 100% stochastic process. Yes I realize one can argue that poker wouldn't fall under gambling under that definition, but I'm not talking about the margin).
- fusiongyro 14y ago
  Do you truly not see a difference between a company leveraging their own assets and a college taking out a loan to play the stock market? Your argument is solid, but simply doesn't apply in this scenario. No college is in a good position to do this. If they were, they'd be a hedge fund instead.
  - roel_v 14y ago
    The GP said: "I find the whole idea of borrowing money for investment purposes a little strange. Isn't that basically just gambling?" which is exactly what my comment addressed. One can debate what investment strategies colleges should use, or how much risk they should take on - probably less than these people did, I don't know and I don't really care either. The GP was throwing around populist blanket 'debt = bad' rhetoric, that's the point I was agitating against.
    - fusiongyro 14y ago
      Is it so hard to actually look at the username? I think you're reading "invest" more broadly than I am, and it's not unlikely that I am misusing a technical term, but I certainly do not want to be taken as arguing that debt is intrinsically bad.

fijal 14y ago

It's a gamble along the lines of "I bet I can invest money better than the bank". Often turns out the bank can invest money better. I wonder who convinced them to invest, er, gamble.

fusiongyro 14y ago
In the short term I'm sure it's true. But in the long term, banks have a major advantage over us mortals: they get bailed out. So I'd imagine they tend to win in the end.
EliRivers 14y ago
If the bank's so smart at investing, why did they give the money to someone who was going to lose it all on the stockmarket? :)
- ptaipale 14y ago
  Because the borrower had good collateral, and this was good business for the bank. It is what banks are supposed to do. Bottom line: I think this is not a good case why you need more regulation of banks. It may be a case why you need more regulation of universities.
  - Gormo 14y ago
    Before we discuss more regulation of either banks or universities, perhaps we should first consider the extent to which we need more regulation of regulation.
    - ptaipale 14y ago
      Indeed. That is perhaps the first priority. Too often the approach "this didn't work out, so we need more of it".

reeses 14y ago

It's just debt arbitrage. The problem is that they were not sufficiently sophisticated (i.e., they were ignorant about how the game was rigged, the house was built on an old cemetery, or that they were walking through the part of town with the highest violent crime rate) to profit in an extremely hazardous environment. I won't get into the "providing liquidity" or "it's just moving money around" arguments (feel free, though), but it's not significantly different from taking out a loan or accepting funding for a start-up. In most cases, you are accepting more financial risk than you can afford to pay in the belief that you can leverage that capital to generate a profit above the principal and interest. While in come cases it can be very much like gambling, that also covers "games" where skill can influence the outcome. For example, slot machines in a Russian casino are probably not the best risk. However, if you're a good poker player, you can do quite well in private games.

arethuza 14y ago

Of all the possible reasons for borrowing money I would have thought that investment is by far the best!

namdnay 14y ago

You could argue that this is exactly what you're doing when you buy a house. You're more or less borrowing money to invest it in real estate. I think the problem is borrowing money for risky purposes (which btw seems to be the scenario for about 50% of gangster related movies)

icebraining 14y ago
It's only the same if you buy the house purely to re-sell it later. Most people live in the houses they buy, so they extract value out of it that a bank wouldn't, even if they don't earn more when they sell it.

roel_v 14y ago

No, it isn't. People across the world make billions (combined) every week doing just that. From Fortune 500 LBO's over leveraging assets to finance real estate portfolio expansion (despite what you read in the papers, there are still many profitable ways of doing this) to bank loans for starting small businesses - it's all about risk management and entrepreneurs having better access to information on profitable opportunities than those with capital (often, banks, but also angel investors). I'm a bit fed up with the 'finance = gambling' fallacy - there is a spectrum of risk profiles, and money can be made in arbitraging this risk, without it being 'gambling' (which is, by definition, risking money on a 100% or near 100% stochastic process. Yes I realize one can argue that poker wouldn't fall under gambling under that definition, but I'm not talking about the margin).

fusiongyro 14y ago
Do you truly not see a difference between a company leveraging their own assets and a college taking out a loan to play the stock market? Your argument is solid, but simply doesn't apply in this scenario. No college is in a good position to do this. If they were, they'd be a hedge fund instead.
- roel_v 14y ago
  The GP said: "I find the whole idea of borrowing money for investment purposes a little strange. Isn't that basically just gambling?" which is exactly what my comment addressed. One can debate what investment strategies colleges should use, or how much risk they should take on - probably less than these people did, I don't know and I don't really care either. The GP was throwing around populist blanket 'debt = bad' rhetoric, that's the point I was agitating against.
  - fusiongyro 14y ago
    Is it so hard to actually look at the username? I think you're reading "invest" more broadly than I am, and it's not unlikely that I am misusing a technical term, but I certainly do not want to be taken as arguing that debt is intrinsically bad.