Getting Real Tough with Bankers

I would think so. In a thriving economy, business needs capital to expand, and to pay for goods which they expect to sell. Most car dealers, for instance, could not operate without massive loans. They could not, themselves, pay for their inventory. And, of course, people almost universally need loans to buy houses. Those loans are called "mortgages". But I am sure you already know all of this.

[QUOTE=kennethamy;113591]I would think so. In a thriving economy, business needs capital to expand, and to pay for goods which they expect to sell. Most car dealers, for instance, could not operate without massive loans. They could not, themselves, pay for their inventory. And, of course, people almost universally need loans to buy houses. Those loans are called "mortgages". But I am sure you already know all of this.[/quote]

I agree that a business needs capital to expand, but whether or not debt is a necessity to do so is another matter. I would like to think (wishful thinking perhaps) that a business can successfully expand without the use of debt--perhaps by having a business owner that strives to retain earnings as he conservatively grows his business to meet only moderate increases in demand.

I do acknowledge that growth may be somewhat retarded as a result (and may not grow as fast and as risky as competition might), but I'm not so sure that such things (and so I asked what I did) will fail to result in a thriving economy with low unemployment.

As far as car dealers go, I'm certainly no expert on the issue, but I thought most new car dealers got their cars on consignment. Instead of borrowing money to buy inventory, they borrow the cars to have inventory. When the cars sell, they don't pay back money borrowed (since no money was borrowed) but instead pay for the cars they borrowed and sold. I could be wrong I suppose.

As far as mortgages go, I see your point. If everyone saved up for a house before buying and paying for it in full, there would practically be no new home sales economy, let alone a thriving one, but I'm certainly not advocating an abolition of debt. We should not necessarily do in a crisis what we would ordinarily do when things are stable. If we were a no debt society, I wouldn't advocate debt, but since we are so dependent on debt, I think we should continue to have debt, but because I think it's generally best to avoid it, we ought to strive to do without it when we can.

Can our society be maneuvered over time into a position where debt isn't a necessity--yet still have a thriving economy with low unemployment? Maybe the answer is as you say, but I'd like it to be otherwise.

Would talk show hosts be referred to as fat cats as well? Just curious.

I guess sticking it to the fat cats goes something like this:

Step One: hold press conference to proclaim that you are going to stick it to the fat cats

Step Two: continue employing the following people

-Mark Patterson, Cheif of Staff for Treasury (previously V.P. of government relations at Goldman Sachs)

-Niel Kashkari, Head of Office of Financial Stability for Treasury (previously V.P. of Goldman Sachs)

-Gary Gensler, Head of CFTC (previously Partner and Managing Director at Goldman Sachs)

-Stephen Friedman, Chairman of National Economic Council, Chairman of Presidents' Foreign Intellgience Advisory Board (previously CEO of Goldman Sachs)

-Joshua Bolton, White House Cheif of Staff (previously Executive Director of Legal and Governmental Affairs at Goldman Sachs)

-Edward Forst, Special Consultant on Fannie and Freddie Bailout (previously Executive V.P. of Goldman Sachs)

-Reuben Jeffrey, Under-Secretary of State for Foreign Affairs, Interim Cheif Investment Officer for TARP (previously Managing Director and Partner for European Financial Institutions Group of Goldman Sachs)

-Steven Shafran, Sr. Advisor to Treasury Secretary (Partner at Goldman Sachs)

And that's just Goldman Sachs, and just this adminstration



In any case, to answer the initial question, debt aids in economic growth. There is nothing inherently wrong with debt, so long as that is debt from savings; i.e. a situation in which excess, unused capital is lent out for productive employment at rates of interest set by the free market. If, however, debt is accrued by expansion of the money supply and used to fuel consumption at artificially low interest rates, the result will be disaster.

Basically, debt in a sound currency regime is fine. Debt in a fiat currency regime is both inevitable and ultimately lethal.

But is debt necessary? What businesses need to grow is money, and the source of money need not come from increasing their debt load. It can come from retained earnings. Growth may not be as rapid, but some businesses survive and prosper without ever going into debt. What I see is a significant reliance on debt as a tool, but it's that very cancerous view of debt as a tool I oppose. It's the very thing failed businesses, a dismal economy, and failed marriages are all too often made of.

Of course, I'm not advocating the abolition of debt, but what I don't see is why we must incur significant debt for our economy to thrive.

It is an interesting phenomena of wall street and banking bonuses that they are paid from revenue streams not from profits. There are all kinds of preverse incentives in this business model. If you want people to take the long term view their salaries and bonuses need to be based on long term profits.

Too big to fail? Why does the government allow private entities to become so large their collapse (even due to poor management and poor business practice) represents a threat to the overall economy. Would not the public interest and the stability of the system be better served by ten competing companies (none too large to fail and none representing a systemic risk to the overall economy) than by two or three companies who have budgets larger than many countries GDP. Two or three large companies who can easily fix prices without memos or meetings is not a market economy, it is not capitalism. Governments should intervene in markets to preserve competitiveness not to reward campaign contributions and political connections.

Capitalism is creative destruction. Those less able, less competitive with inferior practices or products fail and are replaced by newer more innovative industries and companies. Too big to fail is not capitalism it is cronyism. Government should ensure competition and aid entry into new markets, not create barriers to innovation and subsidies for inefficient industries.

Political intervention into markets always results in inefficient allocation of resources and human capital. The government (federal, state and local)already comprises some 40% of the overall ecomony. Can one regulate and tax innovation and efficiency out of the economy? I think so . Politicians are not suitable to run companies. The government barely functions as it is. Do you really want more than half the economy run based on political not economic or market factors?

Enforce the monopoly laws. Eliminate or down size companies "too big to fail". Reward people for long term profits not short term revenue streams. Let the market, not the politicians pick the winners. We will all be better off in the long run.

[QUOTE=fast;113744]But is debt necessary? What businesses need to grow is money, and the source of money need not come from increasing their debt load. It can come from retained earnings. Growth may not be as rapid, but some businesses survive and prosper without ever going into debt. What I see is a significant reliance on debt as a tool, but it's that very cancerous view of debt as a tool I oppose. It's the very thing failed businesses, a dismal economy, and failed marriages are all too often made of.[/QUOTE]Imagine for a minute what it would do to an economy to greatly shrink the money supply (fewer dollars in circulation or available) or to greatly expand the money supply (more dollars in circulation). Increasing the money supply generally leads to easier credit, lower interest rates, more debt , more economic activity and on the down side higher inflation. Decreasing the money supply generally makes it more difficult to get credit, lower rates of debt, slower growth or recession and if severe price deflation (if dollars are rare it is hard to get people to part with them). That is the major role of the federal reserve adjusting the money supply to changing conditions. Balancing between combating recession or encouraging growth without inflation or deflation is not an easy task.

National debt, like personal debt, is not in and of itself either a good thing or a bad thing. It depends on what the money is used for or spent on. If the US had used the current economic crisis to make much needed investments in its underlying infrastructure (roads, bridges, dams, sewers, water supply, electrical grid, next generation internet, schools,), then that debt would have represented an investment which likely would have paid huge dividends in future economic growth and quality of life for its citizens. The American Society of Civil Engineers estimates there is about 2.5 trillion dollars worth of needed upgrades to these types of structures.

Instead politicians (who are more concerned about getting reelected in the short term than the health of the nation in the long term) have spent the money allowing people to collect extended unemployment for jobs that will not come back, subsidizing business which are not competitive, allowing people who cannot afford the homes they bought in the first place to remain in them. We also are spending large sums conducting two wars overseas with unclear goals and unclear timelines. In addition entitlement programs social security, medicare and soon universal health care are requiring larger and larger sums for an ever enlarging, longer living, more capable but also more expensive elderly population and health care system. These programs as originally conceived are no longer economically viable but to modify them is political suicide.

The problem with elected officials is they find it hard to take the long term view and are not willing to sacrifice their jobs for the future good of the nation. The problem with an entitlement society is once the current generation discovers that it can create present benefits for itself and push the cost onto future generations it will do so. The problem with populism is politicians pander to the short term desires of the population and their personal desire for reelection at the expense of future generations and the long term health of the nation. The development of self serving politicians and an entitlement mentality in the population may be the greatest threat to representative democratic forms of government yet.

So no personal debt, corporate debt, national debt are not in and of themselves bad or good, it all depends what you use the money for. The private sector in a true market (as opposed to monopolistic economy) invariably allocates capital and human resources more effectively and efficiently than politicians in government. If you want a long term healthy economy the size and scope of government must be limited. Government spending is approaching 40-50% of the economy. This should be cause for concern. We have done the central planning of economies versus market economy experiment over and over and the results are invariably the same. Markets over time produce more wealth and higher standards of living (in the long run everyone benefits more). Factory closings, foreclosures, unemployment, job losses are the price paid for reallocation of those individuals and those capital resources into more productive endeavors (creative destruction) and debt is the mechanism which allows new business the capital they need to innovate and grow.

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[QUOTE=prothero;114222]National debt, like personal debt, is not in and of itself either a good thing or a bad thing. It depends on what the money is used for or spent on.[/QUOTE]It may not be inherently bad, but it sure needs a negative stigma attached to it.

Like most decisions, it's not unwise to weigh both the advantages and disadvantages of the decision, both over the short term and long term. I think it's best to avoid debt, for it has been shown that most people can't handle it properly. To avoid debt, however, is not to never have debt. I think we should not be extremists, and I think we should often allow for exceptions.

For example, if you have no debt, three to six months of expenses saved away, an additional twenty percent down for a house, then it's reasonable to finance the remaining eighty percent with a fifteen year fixed mortgage where the payment isn't greater than twenty-five percent of your net (take home) monthly income--assuming of course you have been living in the area for a while. That is an example of being smart.

[QUOTE=fast;115591]It may not be inherently bad, but it sure needs a negative stigma attached to it. .[/QUOTE]
I of course disagree somewhat. National debt due to medicare, social security, national health care and unproductive wars is a bad thing for nothing of permanent value or of value to the future generations who will have to service that debt is created. Benefits for the current generation should be paid for by the current generation and everyone who benefits should contribute to its cost. Government benefits should never be perceived as paid for by the minority for the benefit of the majority. Government is not free.

On the other hand the generation of debt to preserve the nation or an investment in the infrastructure of the nation (roads, rails, dams, bridges, universities, electric grid, internet, alternative renewable energy, national parks) etc . would likely pay large dividends for the nation and for future generations and would have been a wise choice. Even if not a choice that would buy votes at the ballot box and reelection for politicians as opposed to statesmen. I pretty much despise populism.

[QUOTE=prothero;115597]National debt due to medicare, social security, national health care and unproductive wars is a bad thing for nothing of permanent value or of value to the future generations who will have to service that debt is created. [/QUOTE]In my opening post, I quoted a passage where it was said by someone that the president is "going to explain their moral duty to help the public after the public (i.e., the Government) did so much to help them."

I am thinking that the president thinks that bankers have a duty to lend start-up businesses and current businesses money, so the issue I think isn't national debt but business debt, and to some degree, personal debt.

Notice where he said, "to help." We should help others, but sometimes, what we think is helpful isn't helpful at all. When a poor relative asks you for money, are you actually helping them or enabling them when you fork it over? I question whether or not we're actually looking out for the best interests of the public by encouraging them to get loans, and that questioning is independent of whether or not the economy would be stimulated by such efforts.

That brought to mind whether or not business debt is even necessary for a thriving economy, for if it's not necessary, then the president's idea that bankers have a duty to lend money is just that much more questionable.