The dangers of socializing debt

When government or some other institution borrows money from the market, they issue something called a bond – a promise of eventual repayment with interest. The basic idea behind bonds is sound: the government or business will take the money and use it wisely in order to better the lives of society as a whole so that they will always be able to pay the loan back later on (the definition of an investment loan). Unfortunately, however, this noble aim has been all but forgotten due to the lack of accountability brought by the socialization of debt.

By socializing debt, I mean that the power and responsibility associated with these enormous amounts of borrowed money is spread over a very large number of people – often thousands or even millions – so that no-one can be held accountable. To illustrate the problems arising from this situation, this post will briefly discuss the three primary types of bonds issued in the United States: Government bonds, mortgage backed securities and corporate bonds.

Government bonds

Long term government debt is a very popular investment vehicle because it is thought to be very secure. After all, an entire nation is responsible for paying it back. However, the European sovereign debt crisis and the soon-to-be American sovereign debt crises offer clear proof of the dangers of socializing debt in the form of government bonds.

Sovereign debt is getting completely out of control in developed nations simply because politicians can only get elected by promising more spending, more benefits and fewer taxes. And since this debt is very thoroughly socialized, no-one really cares about the fact that the debt keeps piling up without doing anything to improve the underlying productivity of the economy (typical of a consumer loan). Like any totally unsustainable system, this can be fun for a while, but eventually you end up with the PIIGS…

Mortgage backed securities

This second type of socialized debt has played a central role in the 2008 sub-prime mortgage debacle that still haunts us today, five years later. In this case, bankers developed some exotic new financial instruments to socialize mortgage debt and, because all direct accountability went out the window, people were suddenly willing to take completely ridiculous risks. Loans were given to anyone capable of signing his name on a piece of paper and the rest is history…

Corporate loans

Corporations are somewhat different. Due to their business nature, corporations are generally good at generating profits and paying back loans (simply because profit really is their only goal). But because the responsibility is socialized, accountability regarding the manner in which the amazing power brought by the trillions and trillions of borrowed dollars is wielded very quickly gets lost. The provocative documentary “the Corporation” describes a corporation as a classic psychopath that will go after its primary goal (making a profit) with no regard whatsoever for things like basic human rights and the environment. Take two hours out of your life to watch this documentary on Youtube. It’s certainly worth it…

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