Morning Must-Read: Daniel Davies: A Disquisition on the Nature of Debt
- Weekend Reading: Daniel Davies: A Disquisition on the Nature of Debt: “Debt… is a promise to pay back…
…a specific amount of money at a specific time. Why is it so popular–why do people always seem to end up getting into it? Why, for example, don’t people make more equity investments?… Debt has one big advantage… the same advantage that market economies have over command economics–it’s really really efficient in terms of the amount of information that people need to gather about each other. If you’re lending money under a debt contract, all you need to think about is ‘Do I think this guy is good for the money?’, and all the borrower needs to think about is ‘Can I pay this back?’. If you’re trying to make an investment and share the risks, all sorts of other questions come into play: ‘How much could this be worth in a really good outcome? What further projects might grow out of this one? What effect will the sharing of the upside and downside have on the way the thing is managed? Am I selling my shares too cheap?…. David Graeber wrote a whole gigantic book, one of the messages of which was that from an anthropological view, debt contracts denatured exchange relationships and took them out of their context of cultural human interactions, but in my review, I noted that Graeber didn’t seem to appreciate the extent to which this is a collossal time saver…. And this even extends into credit analysis. I once calculated, to win a bet… that… if banks were to carry out a full credit assessment on all of their counterparties every time they incurred a new exposure then this would take up all of the time of every Chartered Financial Analyst ever to have got the qualification, doing nothing other than these credit checks. It’s literally impossible for the system to work without a degree of blind faith that most credits are money-good. The conclusion… is that… from both the banks’ and Greece’s point of view, these weren’t bad loans–they were good loans which went bad…. All of which isn’t to say that the banks deserved to get paid back, quite the opposite… the 70% writedowns that they took should… be regarded as… just punishment…. Everyone made decisions just as bad as the Greeks, but as I say, Greece was less able to deal with the consequences…