Friday, April 23, 2010

A Culture That Embraces Leverage

Everywhere you look, debt is favored over equity. Is the most recent crisis not simply the natural outcome of this ongoing policy (or should I say, "policy error")? Leverage leads to volatility, and volatility to instability. And you don't need to just look at the housing crisis, take a look at the various cycles of LBO booms and busts. Would these have reached the same magnitude if we didn't tax-favor debt?

It is a little disingenuous to rail against the obscene leverage that the banks had while turning a blind eye to policies that helped create the incentive societywide. As any economist will tell you, incentives matter. So shouldn't we look at the incentives we have put in place?
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