Britmouse over at uneconomical has this golden quote:
Those who assert that households “need” to deleverage (which is really an argument about expected future income) must address the question of the desired level of leverage. Is 144% too high or too low; how should we decide where to draw the line? Should we let central
plannersbankers decide by plucking numbers out of the air?
And because debt is just (ah ha) money we owe to ourselves… let’s not forget household assets, which continue to dwarf liabilities; household net worth was up from £6tn in 2008 to £7tn in 2011 in the last Blue Book estimate, mind-boggling numbers.
“Deleveraging is good” is one of the group of poorly hidden value judgments that come from the broad “rebalancing view” that gets thrown around.
If we, as a society, see high leverage levels in the economy we need to ask “why the hell do I care”? If the individuals borrowing, and the individuals lending to them, are doing so without coercion, and the risks they face only impact upon them, then who cares.
But we may get concerned about the stability of the banking system, we may believe that the taxpayer is implicitly subsidising risk, or as a society have a special concern around Veblen goods (think of it in terms of “keeping up with the Johnes”), we might come up with reasons why leverage can be excessive. Armed with a cause we can design policy.
The problem is that we see something like high leverage, decide we want to do something about it, and then post hoc justifying policy on the basis of whatever economic explanation we can tie together. As we noted in from this Friedman quote, there are an infinite number of hypotheses that “fit” the data – and as a result, this is easy. We need to limit the number of hypotheses by actually asking “what are the trade-offs involved”, and the best way to do this is not to assume our policy conclusion as a starting point 😉