Thanks, Jim.
Now consider this- the main thing interest rate policy does is move income between savers and borrowers.
For example, in the last year or so savers have gone from earning maybe 4.5% to something near 0 today. And borrowers (and lenders making larger spreads) have equally benefited.
So what I’m getting at is the Fed has the authority to shift mega sums from savers to borrowers, and vice versa.
That’s like giving the social security commissioner the authority to raise payroll taxes and pay out more benefits, etc.
Not to mention the swap line authority where the fed can lend unlimited sums to foreign governments, and on an unsecured basis as well.
The real ‘power’ of the Fed is with these powers of distribution, which far outweigh the generally perceived power of altering the macro economy via changes in interbank interest rates.
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Shifting income from savers to borrowers is a zero sume game unless their is more of a propensity to spend by borrowers.
right, or vice versa.
that means the fed is conducting a massive redistribution of income when it changes rates, without altering the macro economy via any other channel.
Why do you count borrowing as income? Do you mean because it makes
the carry trade( resulting in net income) easier to implement?
it’s only income if you know you don’t have to pay it back
income is as income does.
all the defaulted mtg loans turned out to be one way transfers of nominal wealth, for example
Hi Warren:
What do you mean by “it’s only income if you know you don’t have to pay it back”?
I assume you mean that the money you get when you take out a loan (borrow) is *not* income because you expect to pay it back some day, but if you take out a loan and plan to default on it, then that loan *is* income. Yes?
So if you take out a mortgage loan, default on it, and then your house gets repossessed, that loan would count as income? But if you take out a mortgage, pay it, then the mortgage does not count as income.
right.
for example, if i loan my kids a bunch that they are incapable of paying back the irs will call it a gift and tax them on the ‘income.’
I think Zanon’s point is that to count this as income doesn’t make sense from a “normal joe” perspective. This is because the end point of the process that he described (loan origination > current status > default > repo.) is that the individual who initially “took out” the loan ends up both without the loaned funds and without the property that secured those funds. And, during the time that they were not in default on their loan, repayment of the note was a cash flow draw, so from a balance sheet perspective the loan and the property that secured it was a liability not an asset. Therefore, I think Zanon was getting at the point that it’s hard to see a defaulted loan as “income”, just as a non-defaulted loan, paid in full, could not be seen properly as income but in fact as an expense.
I think it’s interesting because the loan is in fact income for someone, but not for the lien holder or the property “owner”. For example, K builder H sells a home to joe for 500,000. Joe puts 0 down on a stated income loan from lender C and then makes 75K in payments on the loan before going into default. Lender C repos the home but appraised value has fallen and they dump it at auction for 300K.
In this scenario (lots of that scenario unfolding around here), lender C initially loaned Joe 500K, got paid 75K, and sold the collateral at auction for 300K. So, lender C took a 125K bath. Joe is out 75K in “rent”. Wouldn’t the result of a situation like this in fact be that the only income was to the direct beneficiary of the funds, e.g. the seller? For both the borrower who defaults and the lender, it seems more like a loss to me.
first, i was writing about unsecured loans- loans where the lender loses. those were just a transfer of nominal wealth from lender to borrower (who might have transfered it to someone else)
yes, but another way to look at it is the borrower got net 125,000 of income that he gambled away, and the seller of the house won that bet.
if you earn income and gamble it away it’s still income
WARREN: That makes sense. Unsecured loans, when defaulted on, are totally income. In the past, I think the IRS even taxes writedowns as income.
right, makes sense