So I want to make this post as gentle as possible but it touches issues that are for some reason quite emotional with me. I feel the call of the shrill.
The more I here people talk about the issues surrounding first the financial crises, inflation and now the debt ceiling the more it makes sense to me why Wall Street pays such enormously high salaries.
For example, there is this meme going around in reference to the debt ceiling were folks are asking rhetorically: If you keep hitting your credit card limit should you always raise you limit?
Is this a serious question? Of course you should always raise your limit. If the Red Sox win the World Series you should raise your limit. If you dog takes a poop in the park you should raise your limit. If it rains on Tuesday in July you should raise your limit.
Why?
Because you should always raise your limit. The whole point of the limit is to protect the creditor against you. If he willing to forgo that, take it.
Trying to play games with your credit score aside, it is always but always better to have more liquidity than less.
It is always but always better to be playing with or have the potential to play with someone else’s money. It is always but always better to have more credit and to be more heavily leveraged.
The only question is the price you have to pay. The carry and the exposure. However, the carry on a limit raise is zero, there is no exposure and the asset is pure liquid. You always take free liquidity.
Imagining a friend of mine saying, “Hey I was just offered a bunch of liquidity at zero carry, should I take it?” is like having a single male friend ask me, “Hey Monica Bellucci just asked me to spend the weekend in Aspen with her, should I take it?”
Well, are you a crazy person? Do you make it habit of throwing away option value and weekends with iconicly beautiful women?
Maybe some people do.
Maybe some people do.
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Sunday ~ July 10th, 2011 at 4:50 pm
buddyglass
The reason folks answer the question, “If you keep hitting your limit should you keep raising it?” with “no” is the understanding that the borrower in question has inadequate self control. The limit theoretically serves as a barrier to additional irresponsible borrowing.
That’s why they posit that if one continually hits one’s credit limit that one should not seek to raise it. Not raising means you have to stop borrowing. Raising it means you’ll just borrow more and go further into debt.
Monday ~ July 11th, 2011 at 9:19 am
DJAnyReason
If you can forever raise your credit limit, then you can raise it past the point where it is worth more to you to declare bankruptcy than to repay it. At that point, your lender has done goofed and you need to keep taking as much as they’ll give you until they call the bill. Then you declare bankruptcy and win.
Monday ~ July 11th, 2011 at 12:22 am
teageegeepea
I suppose the implicit logic is that there is an agency problem. Political actors are borrowing in the name of the American people, and if they are irresponsible we are on the hook. Congress having a debt limit is like parents limiting how much their kids are allowed to borrow.
Monday ~ July 11th, 2011 at 11:11 am
Doug Bonar
Isn’t it great we are at the point of thinking of Congress as the kids?
I agree that you should always raise your credit limit if is a pure option. But you shouldn’t always raise the limit of others have access to your credit cards and can stick you with the bill.
Tuesday ~ July 12th, 2011 at 12:11 am
John
You are aware that more leverage equals more downside risk to you right (at least in the case of investments). I guess you could argue that beyond a certain point you should just continually add leverage because if the smallest thing goes wrong you’re busted anyway.
Wednesday ~ July 13th, 2011 at 2:21 pm
Apex
I understand the underlying theoretical point here and it is of course valid. But this isn’t theory and the actor has a built in condition that makes the use of the leverage not an option but a certainty.
Is it smart to stock up on extra free high calorie ice cream? Well of course it is, its free and you don’t have to eat it, its just an option. Would your answer change if the person was trying to go on a diet and was notorious for falling off the wagon?
What about an alcoholic trying to get sober, A well stocked liquor cabinet is just an option and who knows when you might need some extra alcohol, for cooking perhaps. I mean you don’t have to consume it, it’s just a free option right?
Or if these examples are considered poor analogies because they are not financial, what about your 22 year old kid who wont move out of the basement and get a job even though he is capable and has skills that could get him employed. Is it wise for him to raise the credit limit on all his credit cards? Does that increase or decrease the odds he will attempt to get a job and provide for himself? The 22 year old who is given the option to raise his limit would obviouslywant to. But is he better served by staying in the basement and staying dependent or by getting forced to make a tough choice that serves him well long term. If your kid was the 22 year old and he could get his credit limit raised continually with no cost to you and with no carry cost to him would you be happy to let him live that way the rest of his life? Would you recommend he should repeatedly take that deal knowing it will likely result in him becoming a permanent bum?
I believe there are larger issues than the theoretical issue that free leverage is a no brainer? Free leverage tends to be like a drug. It allows living in an altered state of reality. For those already living in that altered state, giving them more ensures they will stay in that state longer.
Thursday ~ July 21st, 2011 at 12:57 pm
Fred Geisler
“Or if these examples are considered poor analogies because they are not financial, what about your 22 year old kid who wont move out of the basement and get a job even though he is capable and has skills that could get him employed.”
Or, to make the scenario fit our experience closer, the 22-year-old who quit his executive position to save on dry-cleaning, and now works as a minimum-wage greeter at Wal-Mart? And the kid’s mother is praising that quit as an act of maturity and responsibility?
OK, so the Bush tax cuts didn’t cause as wide a revenue disparity as executive-to-greeter, but the principle is the same: About half of last year’s budget deficit is because taxes were cut. As long as we have people calling tax cuts a fiscally responsible action, we’ll have people praising the action that led us from “the national debt will be paid off in 7 or 8 years” to “OMG, the debt’s going to strangle us!”
Friday ~ July 29th, 2011 at 3:44 pm
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