So, I really don’t know why I feel so shrill about this. It just irks me. I want to be reasonable and start with, as I usually do, a “well. . .” but its hard.
I am just going to express this honestly for posterity’s sake. I don’t mean that my comments are morally defensible. I believe they are not.
Megan McArdle says
And the bad signals aren’t just to the federal debt market–the flight to quality is ultimately going to push things like mortgage rates down too. Would the people urging the government to take on as much debt as possible also urge our homeowners to once again leverage themselves as far as the banks will allow?
I am sure the emotion I am having right now leads many people on Wall Street to do not so nice things. Its just that the expression here not only misunderstands the fundamental nature of reality but does so, so self-righteously.
Like I said, I am not proud of any of this but I had to share so that at least people now that people who feel these feeling are out there. So I’ll just breathe and try to summon the instincts to be a decent human being.
Ok, so yes you should leverage your house to the maximum the bank will allow. You should always leverage to the maxim your counterparty will allow.
If you don’t get this then you don’t get the concept of “Other People’s Money” which is fundamentally superior to your own money, because it belongs to someone else. If you lose it , they are screwed. They could try to screw you in return but it is always harder to re-screw than to screw.
If there is screwing to be done you want to be the first one to screw, not the last. This is applicable in many contexts, but especially in finance.
This does not necessarily mean that you should consume all of the resources you extracted from your counterparty. You may want to stash them somewhere safe but under your control not theirs. Again, its always better if you have more and everyone else has less. If you don’t get this, you are really missing how the world works.
Though, I wouldn’t necessarily scoff at consuming other people’s resources. One thing about bottles of Cristal and parties in the Caymans is that they cannot be repossessed. If you take the bank or the bondholders money and just blow it, then they are totally screwed with no real opportunity to re-screw.
There are obvious moral implications to this but you should not be under the impression that you are somehow worse off for having done this. It is very clear who is worse off and it is the lender/investor.
Even still what you probably want to do with Other People’s Money is invest it in something riskier. This way you take the upside but they take the downside. Again, you cannot be in worse shape for having borrowed money.
You can be in bad shape for having invested in something that went bad. However, its ALWAYS better to have invested someone else’s money than to have invested your own.
Think about it this way, if you buy a $500,000 house with cash and then the market crashes and you are forced to sell for $250,000 you just lost 250K. That sucks.
If you borrow 500,000 with 0% down to get a $500,000 house, the market crashes and you are forced to sell short or default then that’s somewhat unfortunate.
In some cases it will ruin your credit. Maybe if you left yourself vulnerable the bank can try to come after you. This is the re-screwing part. However, they will not necessarily be successful and at the end of the day there is no debtors prison.
Now, would you rather have bad credit and collectors hounding you or be out 250K. If you are seriously asking yourself this then we need to have brunch. I have got some really great ideas.
In short, you always leverage to the max. What you do not do is buy houses that are going to fall in value. That is a bad idea, but it is only made more bad by having your own money on the line.