Rising margin debt

Jordan Hayes jmhayes at j-o-r-d-a-n.com
Thu Jan 27 07:24:23 PST 2000


I'm looking for some good research on this subject, so if anyone comes across any, send it along. One thing could just simply be the explosion of margin accounts by people who had previously been invested in things (mutual fund families, for instance) where you don't get a margin account -- a variation on my earlier "debt for debt sake" argument. Watching the number of brokerage accounts could provide some support for this.

This of course could give you the impression that not only are levels of debt not "too high" but indeed they are "too low" -- restrictions on credit still leave a large number of people who could manage debt wisely out of the game because there's no way to do it. Are they like those who couldn't get mortgages in the 30s?

Margin debt grew by 46% last year, but overall consumer debt didn't come anywhere close to that. So maybe some people are just rotating out of unsecured high interest/high headache credit cards and consolidating their acconts in a CMA at Schwab or Fidelity?

I think the real indicator here is default and bankruptcy, not how much debt people take on. Debt isn't a priori 'bad' or 'good' -- it's just an exchange of risk. For many people, exchanging a mortgage for a house that is their's is "worth it" -- despite the higher net cost of the house over time. The same can be said of autos, on down the line to big screen TVs in time for the Super Bowl. Borrowing to buy a high-flying stock can also have it's rewards, as (like we saw last week on this list) can getting student loans, gambling that your increase in credentialed schooling will give you a better life in some unspecified way.

/jordan



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