Sunday, September 5, 2010

The edge of husbandry

Recently I discussed Nassim Taleb and the idea of being able to withstand black swans. He recommends a healthy level of redundancy, but also argues that borrowing money can make you vulnerable to black swans, and saving money can protect you from them. Borrowing is also discussed in that great This American Life episode where our New York State politicians freak out about it.

In the past I've listed borrowing as an unsustainable good, and I've also been amazed that governments rely so much on borrowing to accomplish things.

Borrowing is good because you get to spend money on stuff. But as Shakespeare wrote, "Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry." In other words, you have to pay interest, and it's hard to stop borrowing, especially for people who have difficulty thinking long term. Because of this, many people think borrowing is evil. Lending at interest was outlawed by the first Christian Council of Nicaea, and it is still illegal under Sharia.

Not everyone agrees that borrowing is a universal evil. Shakespeare was actually poking fun at these ideas by putting them in the mouth of the disingenuous buffoon Polonius. Garrison Keillor went further when he made "Neither a borrower nor a lender be" the motto of Bob's Bank, in the little green mobile home at the end of Main Street in Lake Wobegon. Essentially, Polonius and Bob are throwing the baby out with the bathwater. Borrowing has risks - paying too much in interest, and borrowing too long - but it can be appropriate under certain circumstances.

On one level it's very simple: if you will be better off when it's time to pay the loan back than you are when you borrow it, then borrowing is a good idea. But behind that simplicity lurk many complications...

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