Forum Post: Debt = Assets
Posted 12 years ago on Nov. 27, 2011, 2:57 p.m. EST by mikebert
(5)
from Kalamazoo Township, MI
This content is user submitted and not an official statement
Through the Tea Party, the Right has developed the meme that our economic problems stem from excessive debt--in particular public debt and call for austerity to restore prosperity.
I would like to suggest a counter meme:
One person's debt is another person's asset.
If excessive debt is the problem, this means excessive ASSETs are the problem.
That is, there is too much wealth needing investment relative to the size of the economy. As a result, there is excessive demand for assets.
This drives asset prices up and brings new classes of assets (e.g. mortgage securities and CO's) to market. The former leads to asset bubbles which destabilize the economy (e.g. the 2008 panic) while the latter has led to financialization of our economy. Both have adverse effects on job creation and income growth.
The solution is high taxes on high incomes in order to reduce the funds available for investment so that old fashioned asset classes like stocks and traditional bonds can accomodate the remaining flow. That is...
DRAIN THE SWAMP (of excessive wealth) that is impeding economic growth.
One person's debt is another person's asset.
If you take out a loan, the bank isn't taking money out of its pocket and giving it to you. It just enters the amount as a figure into your account. That is new money. It never existed before you took the loan.
Many people understand this part - the idea that in fractional reserve the banks are essentially creating new money out of thin air. What most people don't comprehend is what happens when the loan goes bad and why it is a liability, rather than an asset, for the bank.
If you don't pay back the loan, what happens is that the bank still has to meet its reserve requirement. So either its assets are tied up just doing nothing, and not making any money, or, more typically, it has to borrow money to meet its reserve requirement. This is the situation for the bank forever, that is to stay, once the debt goes unpaid, it will be bleeding money indefinately - that's what the whole derivative problem was, a sort of trick to try and sell off these bad debts by lumping them in with good loans and trying to pass them off on unsuspecting buyers.
So. Basically debts aren't assets, for anyone. The loan agreement (ie your promise to pay) is an asset, reserves are an asset, but the debt itself isn't. If it were we could just willy-nilly make loans left and right and everything would just keep getting better and better, regardless if the loans were ever paid back or not - we'd be able to generate assets out of thin air, in effect.
Corporate bonds are debt instruments and they are assets. Treasury bonds/bills are debt and are assets. When a mortgage is converted to mortgage securities and sold to the investing public, these are assets.
You are correct, conventional bank loans are not assets in the sense I used. But conventional loans weren't the problem; it was securitization that led to the problem. And when you securitize you are creating assets which are then sold to regenerate funds which can be used for more loans.
In a world where the S&P500 yields 5 percent there is less need for exotic securities. In such a world there is less need to develop exotic securities, less challenge to an effective regulatory structure, and no financial panics.
Look from 1819 to 1933 there were major financial panics every couple of decades, sometimes more often than that. Then for 75 years there were none. Since the "recharge rate" for panics is on the order of 20 years we can look back to the period around 1986 to see what changed. One thing that changed was the top tax rate fell below 50% for the first time since the early 1930's.
I was suggesting a meme which necessarily involves simplification. The idea was to counter the Debt is Destroying Us meme promoted by the Right with a Wealth is Destroying Us counter meme based on the observation that (problematic) Debt = Assets.
Corporate bonds are debt instruments and they are assets. Treasury bonds/bills are debt and are assets. When a mortgage is converted to mortgage securities and sold to the investing public, these are assets.
Yes but in all of these cases, the debt itself is not the asset. Its the promise to pay that is the asset. Any loan agreement is an asset, but not the loan itself.
Look from 1819 to 1933 there were major financial panics every couple of decades, sometimes more often than that. Then for 75 years there were none.
Absolutely. Keynesian economics were good from a results perspective.
I was suggesting a meme which necessarily involves simplification. The idea was to counter the Debt is Destroying Us meme promoted by the Right with a Wealth is Destroying Us counter meme based on the observation that (problematic) Debt = Assets.
I get the idea but the problem is if it has holes, they'll just rally their economists to go on television and say we don't understand anything because debt isn't an asset and blah blah blah and the economists who do support us will be put on the defensive. We have to ensure our criticisms are ironclad.
Absolutely correct! Bring back the rates of taxation from the 1940's!
I Agree. Eradicate the Bush tax cuts for the rich and institute new taxes on the wealthiest Americans and on corporations, including a tax on all trading on Wall Street (where they currently pay 0%)