AC Flyer,
Why is debt a "privilege?"
Debt is a privilege because it is not a right. Rights are granted or bestowed upon birth; some rights are implicit (as in the Bill of Rights) and some rights are implied (such as the right to expect that one's parents will provide proper care and nourishment, and act responsibly on behalf their children). Privileges, on the other hand, are something that is earned. As a child, when we grow older, our parents grant us certain privileges as we demonstrate that we are capable of taking on responsibility for our actions. Likewise, as we grow toward adulthood other privileges are bestowed upon us by societal laws as we demonstrate our increasing responsibility, such as the privilege to operate a motor vehicle, or the privilege of responsibly consuming alcoholic beverages.
Debt is a privilege that we earn, whether we act as the lender or the loan recipient. We become lenders when we become savers. We are privileged to use the services of a bank or credit union or savings and loan. These institutions act as a repository for the savings of thousands upon thousands of average people with modest balances in their savings accounts. The banks in turn lend these aggregated savings to other people, who may buy automobiles, or furniture, or appliances or homes with the proceeds. Becoming the recipient of a loan entails a responsibility to repay the proceeds plus interest. So the underwriters of the loan will examine the prospective recipient(s) for the ability to repay. They will look at factors like employment, length of employment, prior credit history, other sources of income, savings, future prospects for continued employment or accumulation of wealth, criminal history (hopefully, none) and myriad other factors. Then a decision is made as to whether or not to grant the loan. Hence, receiving a loan, or going into debt, is a privilege, not a right.
And if it is a privilege, who gets to decide who receives the privilege and who does not?
Society, and (to a certain extent) cultural differences decide who gets privileges and who does not. Granted, governments pass laws in an attempt to ensure that privileges are granted equitably (such as disallowing ethnic discrimination in home lending), but those laws do not grant a right to a loan. The laws merely attempt to ensure fairness in the debt process.
So, it is you and me and millions of people like us that decide who gets privileges and who does not. If you are a saver, you reasonably expect the bank to look out for your best interests when they loan your (in essence) money to someone else. If the debtor doesn't repay the loan, and thousands of others debtors don't repay their loans, then the bank will eventually run out of money and be forced to close. If this situation was duplicated time after time, at all banks, then eventually there would be no savings left, and no proceeds to loan to future home buyers or others in need of a short term loan. So you and I will examine a savings vehicle, such as a bank, to ensure that they are acting responsibly with your savings. If we were to know in advance that a particular bank was financially in trouble, we wouldn't run over to that bank to deposit our hard earned money. We would elect to use a different facility, one that was in better financial shape.
The thing about debt is that, like everything else in a free society, it is what it is. It has no moral value, good or bad. Individuals and organizations choose to take on debt, lenders choose to make it available to them. These are free market transactions every one. No-one is forced to make loans or receive them.
In theory true, but in practical application, not so true. How many of us can just go to a home seller and plunk down cash to buy a home? Most of us need a mortgage to buy something that large. Even if we look at something less costly, how many people can buy a new automobile with cash? Likely more folks could buy the car than could buy the house with cash, but still, the vast majority of people need to finance these large purchases.
As to whether or not debt is good or bad, that really depends on how one looks at it. Debt is a vehicle that allows us to advance our standards of living. If one cannot qualify for a mortgage, one is "doomed" to renting, being homeless or living on the charity of others. Being homeless or living off of others certainly is perceived as "good" or "bad". If one does not pay one's debts in a timely and responsible manner, then this is also viewed by society from a "good" or "bad" perspective. So, while debt itself is neither good or bad, the consequences of debt can most certainly be either good or bad.
Borrowers make bad decisions concerning their leverage, they go bust. Debt is liquidated, the ability of borrowers to borrow again is curtailed, no problemo. Borrowers make good decisions about debt, they increase their ROE. Again, no problemo.
I don't think so. Of course there are problems when a debtor doesn't meet his/her obligations. The lender loses capital. Those costs are passed on to the savers through lower rates of ROE on their deposits. We all pay for irresponsible debtors through higher costs for bank insurance. And there are higher costs to be paid to regulators (where taxpayers bear the brunt of government agencies). Debt failures cost us dearly as a society. The costs of failed debt are not much different from the costs of say shoplifting, or the costs of counterfeiting. Ultimately, the costs of the dollars lost will be borne by those of us who are not irresponsible (or thieves like shoplifters).
The bottom line is that debt failure robs societies of their capital savings.
KJC |
