The Debt Economy (should tax deductions on interest be eliminated?)

> I do believe it was the mortgage interest tax deduction that helped create the real estate bubble.

I believe that pants helped create the real estate bubble. After all, almost everyone involved wore them at one time or another.

What? People wore pants before the bubble? That's no more relevant than the fact that mortgage interest was deductible before the bubble.

> Not even aware of where the money was going and that they were spending two dollars to save one.

If you're paying the mortage, you're aware.

Of course, you're only "spending two dollars to save one" if your marginal rate is 50%. If you want to reduce the value of deductions, lower marginal rates....

Mortgage interest tax deductions were certainly an accelerant, as they were designed to be, but that alone wasn't to blame. Packaging mortgages into investment vehicles was a horrifically bad affair which was at least the number two ingredient. How do you manage to take 10,000 mortgagees that on average represent 7% 30 year loans and end up with a packaged investment that rates at 20% return? This involved some loose and unregulated mark-to-market math and relied on home turnover in a superheated market. Once leveraged instrument after instrument has been added into this unregulated space, you end up with an enormous unmeasurable structure of debt that has little to do with houses.

So it may well be true that mortgage tax deductions were a necessary ingredient, this alone did not cause the debt explosion.

Removing the tax shield that some forms of debt provide would only make one avenue of capital raising difficult, it would act much more to encourage other forms of capital raising than to put any kind of stop on it.

This could of course be counterbalanced by making other forms of capital raising easier by doing such things as lowering capital gains tax or, as you suggested, making divident payments deductible.

We got into this "downturn" because too many people borrowed too much, as well as too many lenders being less than careless about who they loaned money to. Failing to fix the incentives to borrow will only make this stuff happen again and again until there is no more economic system left to abuse.

Too many companies are issuing bonds to repurchase stock. And they're not doing it for valid business reasons: they're doing it to puff up their stock prices so that the CEO and Board can get their bonuses - and the vast majority of bonuses at that level are based on stock prices.