Ekstatische Lyriken Pinnwand

Politics: Debt

written by Pj on Wednesday July 27th, 2011 -- 1:02 p.m.

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I almost hate writing about politics as politics sucks, but dammit...

We're presently in debt to the sum of $46,630 per person, or $130,042 per taxpayer.

Would you loan every person in the country $46,630, considering that 25% of them are children? Would you loan each taxpayer in the country $130,042 considering that you know nothing about most of them?

Even if you might loan some people $130,042, wouldn't you first check their financial status, making sure that there's a reasonable expectation that they'll be able to pay back the loan? Make sure that they have a job, that they aren't already drowning in debt, stuff like that?

Indeed, wouldn't you insist on some collateral, perhaps the deed to the house they plan to buy with that money?

...or would you just loan them $130,042, no collateral necessary, based on the fact that they've always repaid their loans in the past?

Someone ran a nice scam in Second Life once.  They set up ATMs promising a nice interest rate on deposits.  As deposits came in, they were used to pay the interest on withdraws from deposits from the previous day.  As people collected their interest, word spread, and popularity of the ATMs increased.  It was a pyramid scheme.  ...and like all pyramid schemes, it couldn't go on forever, and eventually people lost a lot of money.

What has the U.S. been doing? We started by spending more money than we collect through taxes.  To enable this, we borrowed some money.  Then, as time passed, we paid interest on that money.  However, we didn't raise taxes, and we didn't lower spending, so how did we pay that interest? The money must have come from the additional borrowing we did.  We pulled a World of Second Life ATM scam.  Having never increased revenue to cover expenses, there's no way to say that the interest paid on our loans wasn't paid for with additional loans. 

...and the world bought it.  We have a perfect credit score.  What's that based on? It's based on the fact that we've never defaulted on a loan.  ...and that's it.

Any sane investor is going to look closely at anything they invest in.  When you get a loan for a house, they make sure that the house is worth what you're paying for it (so that the collateral covers the debt) and they make sure that your income exceeds your expenses so that they know you can make your payments.  Similarly, anyone who might invest in Second Life ATMs might want to know how their business operates, and after seeing that it is a pyramid scheme, realize that it isn't something that can go on forever.  Thus they might be excited if they're getting in on the ground floor, but if a lot of other people are involved already, they would do well to stay away.

So what to do about the debt crisis? Personally, I think it's time to default.

People don't want to do that, of course.  We've all been told that it's bad not to repay a loan.  ...but having not repaid a credit card and a car loan, I've had some time to think about loans in general, and there's a real evil side to them that no one really wants to acknowledge. 

I once had some friends ask me to loan them money to pay their rent.  Neither had a job, having quit their previous jobs.  Both were 18 years old, fresh out of their parent's house.  So I said no.  It would be stupid to loan them money when there was no reason to believe that next month they'd be in any better financial position than they were.

The logical thing for them to do would be to move out of their apartment and back in with their parents, thus reducing their expenses to match their income.  ...and if they couldn't do that (but they certainly could have) they could move in with some friends.  I told them they could move in with me if they had to.  They eventually got the money from their parents, whom I presume probably felt it worthwhile to keep them out on their own.

That's the problem with credit.  Without credit, there's a hard wall you run up against that says "hey, dumbass, you're doing something wrong here" and makes you stop and look at things immediately and figure out what is wrong.

When I got into debt, it wasn't in the stereotypical way, buying shiny new things just because I can.  I got there buying stuff that I thought I needed.  I ran up $4,000 on a credit card buying shit like food, a plunger, a shower curtain, and other typical household expenses.  I also got a loan for a car, at an interest rate so high I would have done better to make ATM withdraws on my credit card.  Truth is, I should have moved in with my mother (who previously moved out on me, and I chose to stay where I was).  I should have fixed my old car rather than buy a new one, even if the new one wasn't anything special.  (Indeed, I did later fix the car for far less than the cost of the new one, and it nearly outlived the one I bought.)

I think most people get into debt this way.  They aren't being irresponsible, they just don't know what they're getting into.  I assumed that I needed the things I bought, as they were just typical stuff, and people are supposed to be able to get enough income to meet their expenses, so I assumed the two would eventually balance out. 

Also, "predatory lending" doesn't help at all.  Take the $1800 car I bought, for which I only needed $1650 of in a loan.  After being turned down by two banks, I went to "citifinancial" or something like that.  They told me they could offer me a 3 year loan with monthly payments of $120.  That would include some insurance so that I only needed to get liability insurance.  I'm not sure I even did as much as "$120 x 3 years" in my head to think about it.  I thought about it no more than "it's a loan, there's interest, that's how it works."

When the loan was complete, I got a pile of loan papers with it.  I learned some things.  The interest rate was 25%.  I could have gotten 20% on my credit card with a cash advance.  Seems that insurance wasn't a monthly payment either: Instead they billed me for it all in advance so that they could charge interest on it as well.  I never even looked into whether or not it was a fair rate.  There was even $100 tossed in for a "loan fee" and maybe a few more things like that.  In all, for my $1650 loan, I had a principle of $3000, nearly twice the amount, and at the worst interest rate allowed by law.

I'm sure a lot of people never even realize they've been screwed.

Now, popular opinion is that when someone gets a loan, they have a responsibility to make sure that the terms of the loan are fair, and that they can keep their agreement.

I'm not going to argue that's wrong. 

What I disagree with is the other popular opinion, which is that those who loan others money are entitled to be repaid in all circumstances, even when, with a small amount of due diligence, they could have predicted the default well in advance of the loan.

After all, why should the person who obtains the loan be held to such a high standard of responsibility, while the creditor is free to hand out money to anyone under any circumstances, even if it might mean "debt slavery" if the debtor who can never pay down the principle, or even in the less severe case where the debtor can repay the debt but not without severe financial hardship?

Sure, people should be responsible, but people on both sides should be responsible.  Those obtaining loans should ensure that they can repay them, and those offering loans should ensure that those they loan money to can repay the loans.

So when we have people making loans despite obvious knowledge that the loan makes no financial sense to the debtor, but instead simply hoping that they'll get enough interest on all of their loans to have some cash left over after absorbing the losses from the defaults, why should we care that the creditors aren't repaid? After all, such behavior is no more responsible than people who get credit cards with no intention of repaying them, but instead simply planning to buy a bunch of toys.  No one cares when those people get a bad credit score and can't get another credit card, so why should anyone care when bad lenders run out of cash and can't offer any more loans? Both are simple matters of people hoping to make money on the ignorance of others, but getting what they deserve in the end. 

Indeed, if those bad debtors go out of business, it probably won't be with massive losses, but rather, with a failure to make enough profit to stay in business.  After all, once your profit falls below what you might get from a U.S. Treasury Bond, you might as well invest your money there instead and save yourself a lot of hassle.

So, think about all of this: We're in debt up to $130,042 per taxpayer, and that debt is unsecured, not backed by any collateral, and yet we still find people to loan us money.  ...and at an incredibly good rate as well.  Divide our interest by our debt and we're paying about 1.5% per year.  Who would loan more money to someone who is $130,042 in debt, none of which has collateral, and who also hasn't seen positive income in decades, indeed has no real plan to have a positive income in the future, and despite all of this, someone wants to loan us money at a 1.5% interest rate?

If that's not irresponsible lending, I don't know what is.

Yes, it was completely fucking irresponsible that the government ever got itself into this position, but let's not pretend as if our creditors are innocent.  They're enablers.  They weren't helping out a friend in a moment of hardship.  They were "helping" a friend with an obvious spending addiction, funded by a pyramid scheme of loans, with no plan whatsoever of being more financially responsible in the future.  ...and so how did they plan to be repaid? Simply hoping to win their rewards from loans that other fools would offer us in the future? Our creditors aren't innocent.  They encouraged us to get into this mess by making it so easy for us.  Any lender with the slightest bit of responsibility would have said no.

Defaulting is hardly the worst way we could solve this problem.  So let's not pretend like it isn't an option.

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