Friday, December 2, 2011

Questions about financing

If you go to CVS you can buy a bag of Canada Mints for a dollar, and pay with your credit card. You're borrowing money but you don't really think about how you're going to pay it back, because your income stream is so much bigger than that single dollar. But if you go to Best Buy and put a thousand dollar computer on the credit card, you should be thinking about how you're going to pay it off. Will your income be able to cover the credit card payments? If you take out a student loan to go to medical school, the loan itself helps you pay for the skills that can earn you enough money to pay it off. But will your income be enough to cover the loan payments?

If you're borrowing a large amount relative to your income, you'll also want to think about alternate arrangements in case you can't pay that off. If you can't make your student loan payments, there's usually a hardship clause that entitles you to request forbearance. If you can't pay the credit card bill, you might be able to ask your mom to help.

Thinking about regular and alternate repayment methods is the smart thing to do, because you know that if you don't repay your debts on time, you could be hit with penalties. If you use a car as collateral it could be reposessed, and a house could be foreclosed on. You could lower your credit rating, so that if you're able to borrow at all in the future, you may only be offered high interest rates. If you ask Mom to pay your credit card bills, you may wind up having tea with her and Aunt Gladys every week. But the main thing is that you might wind up spending so much of your money on debt service that you can't afford to buy anything new, or even to go to the doctor.

Now we need to be very careful about comparing government debt, especially sovereign government debt, with private debt. Households can't print money to make it easier to pay off their debts. But in this case, government debt is similar: if we ask "How are we going to pay for it?" and the answer is, "We'll borrow the money," we need to ask the two follow-up questions: "Will our income cover the payments on the debt?" and "What do we do if our income doesn't cover the loan payments?"

These are the smart questions to ask, because if New York State doesn't repay its debts on time, we'll face a credit downgrade, and we'll have to pay higher interest rates on bonds in the future. If we get a bailout from the federal government, they'll probably insist on some kind of financial oversight committee. But the main thing is that we might wind up spending so much of our money on debt service that we won't be able to build anything new, or even maintain our existing infrastructure.

In the discussions of paying to rebuild the Tappan Zee Bridge, I've heard a lot about where we're going to borrow the money. There's been very little about how the money will be paid back, and what we will do if we can't make the payments. Those are the smart questions to ask. Why isn't anyone asking them?

3 comments:

epc said...

I happened to take the TZ today returning to Brooklyn from Rockland and was wondering if they could start collecting tolls now for the replacement bridge (ie, dedicate X% of toll revenue collected to a bridge fund) rather than wait for the construction to start or bonds to be issued.

Or is the Thruway prohibited from diverting revenue in such a way?

Adirondacker12800 said...

Pay it back with toll revenue? If I did the arithmetic right 10 billion dollars comes out to 25, 26 dollars roundtrip. Or get the cost down to European prices and do it for 2.5 billion and the toll is 6 or 7 dollars roundtrip. Well, 10 because the bridge has to be maintained and staffed.

Mark Lawrence - Spot Hero said...

Can someone say Chicago Parking Meters?