Monday, November 9

The Devil's in the Debt

Despite working in a bank son, I have problems with debt. I had a long discussion with many technologists and senior managers last week at an industry dinner. They were all getting excited about technological disruptions. Fine. But where's the growth from these new developments? Is this actually adding value? I don't think so. This is extracting more value from unused assets such as spare bedrooms and unused cars but a leap in productivity or sustainable demand isn't there. Where there is, is primed with debt with the underlying assumption that this investment will actually return monies which will be more than the interest rates. Which doesn't usually. So capital is wasted. 

So debt is dodgy. It hobbles you. It forces you to regularly pay. And at a time when you've got to be more flexible and fun to meet the challenges. 

Interesting thesis son. 



The Devil's in the Debt
(via Instapaper)

<p&gtGrim news in the fall of 2008.</p&gt
 Scott Olson/Getty Images
<p>Grim news in the fall of 2008.</p> Scott Olson/Getty Images

The 2008 financial crash was a self-inflicted, avoidable economic catastrophe. It wasn't the result of war or political turmoil, or the consequence of competition from emerging economies. It didn't derive from underlying tensions over income distribution or from profligate government spending.

No, the origins of this crisis lay in the dealing rooms of London and New York banks and shadow banks -- part of a global financial system whose enormous personal rewards had been justified by the supposed economic benefits of financial innovation and increased financial activity.

Many people are legitimately angry that few bankers have been punished. Some were incompetent, others dishonest. Yet they were not a fundamental driver of the crisis any more than the misbehavior of individual financiers in 1920s America caused the Great Depression.

Post-crisis regulatory reforms also miss the mark. Much focus has been placed on making sure that taxpayers never again have to bail out “too big to fail” banks. That's certainly important, but government bailout costs were small change compared with the total harm the financial crisis caused.

The Federal Reserve has sold all its capital injections into banks at a profit, and made a positive return on its provision of liquidity to the financial system. Across the advanced economies, bailout and support costs will be, at most, 3 percent of gross domestic product.

The full economic cost is far bigger. Advanced economies' public debt on average increased by 34 percent of GDP between 2007 and 2014. More important, national incomes and living standards in many countries are 10 percent or more below where they could have been, and are likely to remain there in perpetuity.

Such losses could happen again, and neither bankers threatened by prison nor a no-bailout regime will guarantee a more stable financial system. A fixation on these issues threatens to divert us from the underlying causes of financial instability.

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