Drowning in debt
There is a good article in the TJ today about the high debt load the average Canadian family faces these days. This piled on top of public debt and it would take decades and decades of determined effort to pay it down. Of course, some economists don’t mind debt – as long as your ability to service the debt (i.e. pay the interest) doesn’t become too onerous.
There is a small but growing group of economists suggesting that all this debt has far more pernicious effects and use the example of mortgage default in the U.S. as an example. Apparently, the average U.S. household has deleveraged a lot faster than the average household in Britain because it is a lot easier to default on your mortgage in the U.S. so hundreds of thousands of American families are just walking away from their mortgage debt -because they can. To those of us outside the U.S., it seems strange that the people can deleverage by walking away from debt with virtually no negative impacts. It raises the question of what would happen if everyone who had an underwater mortgage across the world just walked away scott free.
Nassim Taleb says there is no way to predict black swan events and therefore we should try to keep debt to an absolute minimum. Imagine a world where there was 95 percent less debt. 90 percent of the finance industry would disappear. Virtually all of the growth in the finance sector in the past two decades has been in areas meant to manage the risk associated with leverage/debt.
It is an interesting thought experiment. Commerce would still continue. People would still buy houses. Consider the example of Brazil. Because of hyper-inflation until the mid 1990s, banks did not offer any kind of longer term mortgages because they were impossible to price. People had to save up to buy houses. Families would chip in/loan the money – people would just wait. They still bought houses but they had to wait a little longer. The same was the case with other major purchases as well. Now, that is changing because of the stable inflation and Brazil is starting to see worrisome levels of household debt, too.
But it is interesting that many of my relations in Brazil – in my age group – have a house and no mortgage debt. I, on the other hand, am sitting on a fairly large mortgage with 19 years left on it.
While my views on this are evolving, I am starting to think we should look seriously at this issue longer term. Maybe we should set as a goal across society to limit debt across the board. From Millken and LBOs in the 1990s to investment banking in the 1990s, financiers have used massive leverage to make enormous profits until the bubble burst. Maybe the morality of debt should matter.