"History is a wonderful thing, if only it was true"

Sunday, February 14, 2010

On excessive reliance on debt

This spot on
And now we are paying the price
Not that a bit of leverage is all bad, but too much distorts the economy.

Executive Summary - BusinessWeek: Nov 30

"The U.S. tax code allows individuals to claim deductions on mortgage interest, up to $1 million, while corporations can write off all the interest on their debt. As a result, the economy suffers from what dismal scientists call a 'debt bias.' The tax break encourages homebuyers to make smaller downpayments and take out bigger mortgages. It also inflates housing prices, studies have shown. Similarly, the break makes it up to 42% cheaper for companies to take out debt than to issue equity, estimates the National Economic Council. While the tax system alone can't be blamed for the current slump, a recent IMF study found that tax distortions likely led American households and companies to take on much more debt than they would have otherwise."

and more here :

How the tax code encourages debt : The New Yorker:

"If it’s frustrating that the government is footing the bill to clean up the mess, it’s even worse that the government helped pay for the debt binge that created the mess in the first place, thanks to a tax system that actually subsidizes borrowing. Debt didn’t get dangerously out of scale because the system was broken. It got out of scale, in part, because the system worked."

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