Sunday, August 7, 2011

When you owe the bank a trillion dollars

“The federal government shouldn’t borrow money because the federal government should use the same financial approach as households and businesses, who never borrow money.”

Households don’t borrow money? What exactly is a mortgage, then? What is a car loan or a student loan? Where does credit card debt come from? The particular borrowing decision may be a good idea or a bad idea, but mortgages have a rather long track record as the primary method by which apartmentholds become households. It’s prudent to keep our personal debt loads from growing to absurd proportions. It’s insane to think that we should eliminate all household borrowing.

Businesses don’t borrow money? On a day-to-day basis, they actually buy almost everything on credit extended directly by the vendors they buy from, and pay the money later (net 30, net 60, net 90—these are the number of days until the money is supposed to be paid). Business start-up, business expansion, and large-scale business operation is typically financed and refinanced by banks and private investment groups and the stock market. You may have heard of the stock market.

So when I hear pundits say that the federal government shouldn’t borrow money because the federal government should use the same financial approach as households and businesses, who never borrow money, I wonder what isolated third-world village those pundits live in. And then I remember that those isolated third-world villages borrow money too, from Kiva and the World Bank.

The old saw is that when you owe the bank a million dollars, you have a problem; when you owe the bank a billion dollars, the bank has a problem. When you owe the bank a trillion dollars? Turns out then nobody has a problem, until brain-dead politicians decide to turn it into everyone’s problem.


Vardibidian said...

Two points: 1) you are of course correct that borrowing for capital improvements (such as buying a house or building a highway) is not only common for households and businesses but actually a good idea in many circumstances. For instance, if you had people lining up to offer you long-term loans at 2.5%, like the federal government does.

Second, and this is the most important, the federal government is not a household and should not be run as a household. This should be really obvious: households don't coin money, they don't have to defend against other households, and they neither retire nor die--a government should never reach its peak earning years.

Finally, while conservative commentators like to make this analogy to a household, they wouldn't make the obvious corollary: in a household, the welfare of the people is dependent on a certain basic level of revenue. In our household, we live on what we earn. The nation, though, does not live on what the federal government takes in. Because the government is not like a household at all. Obviously.


Michael said...

Living on what you earn seems prudent, but it's only possible with your current standard of living because in some years you borrow much more than you earn. And that's perfectly normal, but somehow invisible in the current societal conversation. When you buy a house, or go to college, or send a kid to college, or deal with a serious illness, or lose a job, or in a million other common circumstances, you don't live on what you earn. You live on what you earn plus what people will lend you.

There are valid conversations to have in those years about whether you should borrow the money, and how you will pay it back at some point, and what other income you might pick up or what other expenses you might drop. But it would be insane to tattoo "bad credit risk" on your forehead before going to the bank and asking for a loan. And that's where the government could take a cue from how prudent households should act. Not because households don't borrow money, and not because the government is like a household, but because acting batshit crazy is a poor approach for both a household and a government.

And I'm disappointed that you're not personally coining money. Because that would be cool.