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Comment by kevinmannix | Hacker News Reader

I wish more people thought this way. Debt can be be used effectively, but as Uncle Ben said, "With great power comes great responsibility." It seems that too much of America is wooed into a false sense of security by their ability to obtain debt without judging their ability to pay that debt off.

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I agree with your sentiment, but it strikes me that there is safety and opportunity in behaving badly when the bulk of your peers are swept away in an orgy of debt fuelled spending.

Ten years ago I bought a small flat in London to live in. I paid a respectable deposit and didn't over-leverage. We were at the end of decade long property boom, there were huge concerns about the level of borrowing and ability to repay, predictions of mass repossessions if the BoE raised rates by even a quarter percent, the BoE would regularly "jaw-bone" the fact that the rate must rise[1].

The bank wanted to lend me 5x the amount I borrowed. I could have bought an entire 3 bedroom house rather than just a 1 bed flat situated in the same property. I borrowed within my bounds, priced the debt relative to an upward BoE rate, played it sensible.

What a missed opportunity! In retrospect I should have taken all the cash the bank wanted to throw at me and bought the whole house. I would have been able to manage the repayments fine, and financially I would be light-years ahead of where I am now.

All because the government will literally burn anyone to keep those vested in the housing market safe (particularly I reference the U.K/NZ/AU, I assume the U.S.A is similar).

Behave badly in droves and the government will never raise that BoE rate. They will burn savers, they will continue to inflate the housing bubble, they will set fire to the hopes of anyone under the age of 30 buying a house to live in. Literally anything to save the retirement nest-egg of a generation of baby-boomers, aided and abetted by a generation of baby-boomer politicians.

Only external factors will bring an end. In the U.K that may be Brexit (as external as that is), in AU that may be Chinese capital controls.

Until those external factors are applied you're fine misbehaving. For me, behaving respectably was a mistake.

[1] The rate today is 0.25%, an all-time historic low. The rate when I bought was 0.5%, at the time an all-time historic low.

Saving in the U.K the last decade? Sucks to be you: https://qz.com/750443/the-bank-of-england-just-cut-interest-...

> In retrospect I should have taken all the cash the bank wanted to throw at me and bought the whole house.

You made the correct decision with the information you had. In Ireland, people who made the opposite decision are still underwater after a decade. So it could easily have gone the other way.

Exactly. The future is frustratingly uncertain. If it wasn't, everyone would have invented Facebook at once.

Just because you got unlucky by being responsible doesn't mean everyone does or will.

I've known people in places where the property market collapsed and its ugly. And I know people think it can't happen in London, but 'it can't happen here' is about as myopic as it gets.

I agree, all markets go up and down. Hindsight being 20/20 and all that.

What I think I underestimated is the length the government or reserve bank will go to in order to protect borrowers at the expense of everyone else.

The property market collapsing (locally, not nationally) is only an issue when you want to sell. If you buy a house with an FHA mortgage (3.5% down), you will be underwater for many years no matter what. But it's a 30-year loan, why would you buy a house if you wanted to move in 3 years?

Plenty of people did this in the US (and I assume other countries) during the Great Housing Debacle of the early 2000's, it's called "flipping." The problem is when the music stops, and nobody wants to buy houses, you are stuck with it, and either need to default on the mortgage or suck it up and live there.

My language is a bit loose, of course the BoE is independent and controls the rate.

But the government sets the BoE remit to use the rate to keep inflation within acceptable bounds, and Gordon Brown decided to move from RPI (which includes some measure of mortgage payments) to CPI (which doesn't).

It does seem madness that we would control monetary supply without consideration of inflation in the largest asset group that lose monetary policy impacts (actual house prices, not just mortgage payments), but then I'm no economist so what do I know.

I mostly agree with you, but I think you missed one problem. Suppose you bought the 3 bed house. You'd have big mortgage payments to make every month. It all depends on when you sell the house. Too early and you would be sitting there watching the market increase further. You never really know when the market will turn, and if you left it too late you could be in negative equity with no way to sell the house and trying to make big repayments, perhaps having also lost your job (since these things happen at the same time).

In other words unless you've got a foolproof method of predicting the future, or you love the thrill of huge financial risks, I think you made the right decision to live within your means.

A three-bedroom house means the poster could have rented one or two of the bedrooms out. Tenants are of course their own sort of risk but that's a common strategy for young home-owners looking to reduce their monthly payments.

I'm not castigating the guy because I think the prudence you're advocating for is far more wise than getting oneself into a financial jam, but there are ways to approach a risk like a house payment and reduce it.

Here in AU the Federal Government is considering allowing access to superannuation (compulsory retirement fund paid out of your wage) to first home buyers to help with a deposit. An interesting opinion piece[0] discusses how this might be construed as a ponzi scheme.

[0] - http://www.abc.net.au/news/2017-03-16/super-for-housing-depo...

Similarly first home buyer grants or stamp duty concessions, they sound appealing to young couples struggling to enter the market but have repeatedly been shown to do nothing but inflate the market further.

When confronted with a golden goose that pumps money into the economy no politician wants to take a long term view of impacts, particularly when it's their generation making easy money at the expense of those who follow.

Indeed, in AU there is also the pressure of negative gearing, which enables a lot of high earners to buy many properties. Even removing negative gearing from properties is a really tough ask to get through politically.

Most Americans are using debt to buy consumer goods. So the question most should ask themselves is, "As a citizen of a first world country, with a good job and a super high standard of living, why is it that I need to consume some of tomorrow's dollars to get myself even more stuff right now?"

I pay everything with my credit card. It automatically gets deducted from my normal account at the beginning of the month. I get a little money for every purchase and the credit card company gets to now my purchasing habits.

Then there's the flip side of using credit cards to get a 1%+ discount on things and paying it off in full. If you have the cash and discipline, debt can be used for very low risk benefit.

And CC companies bank on the fact that if even a small percentage of people aren't able to pay it off in full they'll get their "rewards" back in full within a single period of interest.

They also bank of the fact that you will use your plastic for more frivolous purchases since it's so convenient. Plus you think you're getting some cash back reward later, so you don't feel so bad about it. If you had to pay cash, you might not be wasting as much money.

no they make 1-5% of every swipe

Yep, they make money either way. However, it only takes 1 person carrying a balance at 20% to make up for the rewards of 20 people who spend and pay off.

Debt is new currency. If everyone is buying their cars with credit, soon nobody can afford to buy with cash. Around here even if you have decent wage right now, but not a stable job, you can't get credit to buy a house, while someone with a low pay but stable job can, you're effectively poorer than them.

You seem to appraise the stability of a job as having zero (or at least very low) value. This might be justified if you are certain that you can get a new job in a short term if you lose the current one. However, from the banks' viewpoint the probability of you getting a new job soon enough to not miss any payments may be appraised much lower, possibly being influenced by other economic sectors where getting a new job takes much longer. Banks have interest and dividend payments to make themselves, so they obviously place a high value on stability. So yes, someone with a lower paying but more stable job may be more wealthy than someone with a higher paying but more unstable job.

Appraising the current net value of a job is always a bit shaky though, because there are so many variables.

"I wish more people thought this way."

It used to be common to view personal debt this way.

I noticed a big change in the way debt was perceived by during the late '80s. Since then, debt is seen as normal. I'm pretty sure the finance industry has pushed 'Fractional reserve banking' to the limit to allow unchecked borrowing for land and housing. [0]

Reference

[0] "fractional-reserve banking permits the money supply to grow beyond the amount of the underlying base money originally created by the central bank" ~ https://en.wikipedia.org/wiki/Fractional-reserve_banking

There's also the rebranding of the scary "second-mortgage" into the treat-yourself "home-equity-line-of-credit."

Those are two distinct products. I think they're both scary ways to treat-yourself.

It's the way that consumer culture can grow, because you use your line of credit to buy a second or third car, nicer car, jet ski, boat, canoe, etc. Then when you have all of this stuff you have to buy a bigger property just so that you have space to store it. So that means selling your existing property to someone else to repeat the cycle.

It is certainly an efficient way to keep money moving.

Fractional reserve banking doesn't really exist any more in the developed world. Banks lend against their capital, not their reserves [1].

[1] http://www.bankofengland.co.uk/publications/Documents/quarte...

"In normal times, the Bank of England implements monetary policy by setting the interest rate on central bank reserves."

thx @soVeryTired, plz excuse lack of financial knowledge. What is the definition of "reserves"?

A bank's reserves are the funds it holds in its account in the central bank. Some countries require that a certain proportion of the bank's assets are held in reserve in order to be sure it can easily meet its short term liabilities (i.e. to safeguard liquidity). In that regard, the system is a little like fractional reserve banking. But the UK and Canada don't have reserve requirements at all. In general, the main constraint on a bank's lending is its capital. Which is why you read about "core tier 1 capital ratios" when a failing bank makes headlines.

"A bank's reserves are the funds it holds in its account in the central bank."

Are those reserves (capital) fluid? From the tier-1 you refer I get the impression these are real physical assets and in flux. Interesting. How do the UK banks handle market runs? (I must read more about the banking system) In Aus major banks are government backed with minimal competition.

It surprises me all the time to see what you can do with a CC in America. Here in Europe it's also very common to have a direct debit card. You don't have a monthly bill, but the amount you spend is directly deducted from your account. Lots of people prefer that.

The best option in the US is to use a credit card as if it were a debit card, and pay your balance off every month. This way, you get to take advantage of the better fraud protections, cash-back rewards, and balance-smoothing benefits of the credit card, without paying any intetest. And it improves your credit score.

Unless you have no financial discipline, there's no reason to use debit over credit.

As coming from a country where debit cards are widespread (France), and living in one where they barely existed until recently (Japan), and having had my (japanese) debit card fraudulently used (still a mystery how ; not stolen, barely even used at all ; last use 8 months prior), I now know that credit cards are better in that case: if you notice the fraudulent use early enough, it's not going to hit your account, while I'm now stuck waiting for a reimbursment that will hopefully happen 3 months after reporting the event.

Just for that, I now prefer a CC, not using the "Credit" part of it. Edit: well, technically, I'm using it, but only as a buffer.

But it's always awkward to be asked "single payment?" for ridiculous amounts like $20. Huh, yeah, why? are people really paying such amounts in multiple installments?

I just use my credit card as a debit card. In the US, consumers have better financial protections against fraudulent charges with credit cards than debit cards.

We have those here too, and I think it's relatively common to pay off of those.

Well until recently when the EU decided to "help" consumers I was making £20 a month by using my CC and paying it off in full each month.

And credit cards (in the UK ) provide protection for buyers against shoddy goods

I view debt as gambling against future prosperity. It's a faustian deal you make with yourself to steal your own future earnings to use today. What a bittersweet deal (most of the time)

As a general rule, people in the future are richer than people in the past - both individually and at the society level. It is gambling, but history suggests that it generally works out.

Timescales are a bit off for that rule though. People are generally better off in a few years from now, unless they've been paying that extra prosperity to as monthly interest on their debt.

If the interest is larger than the entire gain, sure. However, most people don't do that as far as I can tell from looking around me.

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