Debt is risky, period. Someone has to pay for that risk when bad things happen and the debt cannot be repaid. Also, people respond to incentives. When individuals and companies are allowed to keep all the profits from their risky activities, but are shielded in whole or in part from the losses, they will respond by taking on more risk than they would otherwise. It's called moral hazard.
Some of this is inevitable, and desirable--risk-taking is the driver of all economic progress. But how much? How far do we take it? Are we actually creating a society worth living in when the "risk-takers" are all rich multinational corporations?
There is a certain truth in that the ballooning housing prices in many places have a lot to do with availability of credit to the buyers. At the same time, if you're planning to build a new house, you'll find that the costs of building itself are also high. Quite simply, building requires lots of labor, and labor today is much more expensive than it used to be in the old days. To build a house under modern standards and code, you're going to spend at least $200k, probably more. It definitely will take a decade if not two before a typical American family can save up as much, especially while making rent payments at the same time.
> Some of this is inevitable, and desirable--risk-taking is the driver of all economic progress. But how much? How far do we take it? Are we actually creating a society worth living in when the "risk-takers" are all rich multinational corporations?
In truth, the real risk-takers are millions of regular people, who don't build any significant savings to weather the storm. I find it strange to complain about moral hazard of government or Fed bailing out businesses by loaning them money, when at the same time individual people are given various kinds of unemployment insurance, child benefits, subsidized housing etc. These might be right thing to do, but they create even bigger moral hazard, and it should be recognized before complaining about businesses getting some government support. Can you imagine government instituting a "loss of profits insurance" program, where every business must pay in some percentage of profits, and which will pay out replacement of profit should something happen, the same way unemployment insurance works? Or a program where government simply gives cash to businesses that are owned or employ people government decides are worthy of support, the same way child benefits work?
The moral hazard you are deftly sidestepping is the fact that bonds/loans do not operate the same way for an individual with collateralized debt vs. a large corporation. And thus, a large corporation can - and does, occasionally - act in accordance with those incentives by assuming bailouts are coming after a black swan event.
Why, then, do corporations get to avoid their collateralized downfall?
it makes financial-risk/reward sense. But only because interest rates are at record lows, and there's evidence in the past that bailouts can happen for too-big-to-fail type companies. Essentially, these big employers can extort a country for a bailout, with the economy tanking as the weapon.
If they cannot rely on the interest being low, and if they cannot rely on a lender of last resort like the FEDs, i'm sure they will be more fiscally responsible.
Unfortunately, these risky behaviour these companies take are the result of years of poor monetary policy by the FEDs and lack of investment into increasing competition in all sectors of industry by the gov't.
