September 26, 2008 § 14 Comments
It is the height of foolishness to take the line that debt per se is bad. It all depends on why you take on the debt and what is done with the money. Most of the things government does with money are foolish, so most of what constitutes the national debt is bad. Buying up all this distressed illiquid paper is one of the few things which are very much not foolish, for a whole host of reasons. Main Street populism seems determined to commit financial suicide here in the name of self-righteous dudgeon.
If Bill Gross (and the investment bankers I’ve spoken to) are right, the federal government will probably earn 15% or so by holding the distressed paper it is proposing to buy, at a steep discount to book, under the plan. The underlying property is still there: real houses, real buildings, real land. This is not like a company, where the entire income stream can go away in a heartbeat because of some unexpected move by a competitor. The underlying assets here are real, tangible property.
So the government will borrow at 3.5%, and earn 15%. Discounting dramatically for illiquidity, if the scenario is right, it is still likely to earn quite a substantial amount of money for taxpayers.
Let me repeat that:
The ‘bailout’ will not cost taxpayers a dime. Not a penny. Not a nickel. It will earn them a substantial amount of money.
There are risks, of course, as there are in any investment in what amounts to a large global macro hedge fund. Those risks are relatively small, and the consequences of permitting bank lockout, money market catastrophe, etc to happen are not relatively small.
This is like co-signing on a loan to buy a profitable but hard to sell investment – a profitable investment which, if it is not bought, will result in you losing your job.
The way main street populists are looking at this is just stupid, stupid, stupid, stupid, stupid. And self destructive. And stupid.
And by the way, if you read Belloc’s essay on usury, you’ll see that this isn’t some post-capitalist libertarian or socialist nuttery on my part. Lending and borrowing money for productive purposes is not bad, and failing to do it when circumstances call for it can be really, really, really dumb. Borrowing money for optional consumption, to enable bad behavior, etc, not so good. Debt in itself, paying interest on loans in itself, is neither inherently bad nor inherently good.
Would you borrow money to have your appendix out so you can go back to work? Would you borrow money to have your appendix out if your appendix contained a diamond that you could sell for more than the cost of the operation, though it might take you some time to sell it? Or would you rather die of a ruptured appendix, because debt per se is bad, even when you stand to both preserve your income and make a profit?
Since when did we become the financial equivalent of Christian Scientists?
(Note: this rant was originally a couple of comments in this thread).