Harvard economics professor and Federal Reserve Bank economist Kenneth Rogoff is the latest establishment figure to speak out against the horrors of the FIRE (finance, insurance, real estate) economy. In Rogoff's view one of the key problem with the FIRE economy is its love of debt:
we need to recognize that the real problems are rooted in excessive concentrations of debt...we are very far from the idealized world in which financial markets efficiently share risk. Of the roughly $200 trillion in global financial assets today, almost three-quarters are in some kind of debt instrument, including bank loans, corporate bonds, and government securities.
Hard to believe we had a debt crisis, though I'm sure taking on MORE debt because the rich bought our democracy so they don't have to pay taxes but always get a taxpayer bailout is the right solution.
Rogoff also notes the tax incentives for corporations and people to take on debt:
policy-induced distortions also play an enormous role. Many countries’ tax systems hugely favor debt over equity. The housing boom in the United States might never have reached the proportions that it did if homeowners had been unable to treat interest payments on home loans as a tax deduction. Corporations are allowed to deduct interest payments on bonds.
Rogoff believes part of the solution is a greater empowerment of equity-based (stock) financing or to use his term "risk sharing." Instead government tends to favor debt over equity both in taxes and bailouts:
Central banks and finance ministries are also complicit, since debt gets bailed out far more aggressively than equity does.
Previous to our current wonderful economy it was against the law in the West to lend money on interest or engage in Usurythis was changed as usurers became more politically powerful and economies evolved around them. Rogoff wonders allowed if there should be a Renaissance in this view, to at least some degree:
I am not advocating a return to the early Middle Ages, when Church usury laws forbade interest on loans. Back then, financial-market participants had to devise fantastic schemes and contortions to disguise interest payments. Yet today the pendulum has arguably swung too far in the opposite direction. Perhaps scholars who argue that Islamic financial systems’ prohibition on interest generates massive inefficiencies ought to be looking at these systems for positive ideas that Western policymakers might adopt.
Yeah...he's the Director of the Center for International Development at Harvard and he's willing to try religious banking models - the establishment is truly exhausted trying to defend this bankrupt system.
I have to give Rogoff points for addressing the issue but he is either too polite or naive to mention a larger truth - the FIRE economy loves debt because it gives them control. The use of debt provides leverage and the ability to exact demands not only on individuals and companies but governments. Without debt financing FIRE would not be able to so easily dictate policy in Washington, Brussels, London and Tokyo.
There is a reason the Chinese Communist Party doesn't allow FIRE free reign - it doesn't want authoritarian competition.
"A man in debt is so far a slave" - Ralph Waldo Emerson