Borrowing - a simple and possibly naive question

littleowl

We are told that borrowing as individuals is largely a 'bad thing'. Older generations appear to believe that one should save to spend, not borrow to spend. I admit I am of this point of view.

It seems, however, that countries and financial institutions can only exist by borrowing.

How can this be right for these powerful entities but not right for the individual?

OK - they (the countries and institutions) say that 'responsible borrowing' is OK; that it is irresponsible borrowing that causes problems - viz. the sub-prime fiasco.

BUT it has been shown that these very institutions have been guilty of both irresponsible borrowing and irresponsible lending.


Why is the financial base of our country - and others - based on the borrowing principle when that brings with it swinging interest charges which filter down to the individual - us? How can our government commit us - the individuals - to a huge financial commitment to save irresponsible banks and bankers who have manipulated the system to their own ends?

I said that this is a naive question and am puzzling to make sense of it.

tomterm8

We are told that borrowing as individuals is largely a 'bad thing'.

No, that is an incorrect analysis, credit is a tool. It's like a chainsaw. Chainsaws are not bad, but using a chainsaw without taking due account of the risks is bad.

In essence, borrowing money is good where it increases your earnings capacity. For example, borrowing the money to buy a car allowing you to go to work etc. Or borrowing money for tools or training that results in improving your future prospects. Or borrowing for a mortgage, where this is lower than your rent.

Where it goes wrong is where borrowing is used to fund consumption which doesn't increase your earnings capacity. For example, borrowing for christmas... because, if this is sustained over time, doing this will result in reduced disposable income and a poorer quality of life.

Borrowing for speculation is neutral, since as long as you guess right you will make money, but at an increases risk if you guess wrong.

littleowl

So - borrowing is OK if it is for the 'right' reasons. I wonder how many hedge fund operators thought they were doing it for the right reasons too?

Surely those 'right' reasons are dependent on your point of view as evidenced by the above?

tomterm8

littleowl wrote: »

So - borrowing is OK if it is for the 'right' reasons. I wonder how many hedge fund operators thought they were doing it for the right reasons too?

Surely those 'right' reasons are dependent on your point of view as evidenced by the above?

Hedge funds essentially move money around the system from places where money is cheap to places where money is expensive. They are essentially beneficial to the world economy, in the same way banks are. What can go wrong though is that Hedge funds can sometimes misprice risk, in the same way banks can, in which case they go kapooee.

On average, though, they add value to the world economy.

johnllew

littleowl wrote: »

We are told that borrowing as individuals is largely a 'bad thing'. Older generations appear to believe that one should save to spend, not borrow to spend. I admit I am of this point of view.

The majority of us can't buy a house with cash so had to borrow. And you?