In Technology and the unbundling of commercial banks, Winterspeak describes the evolution of finance and lists several new, high-tech lending companies. He offers this summary:
The primary purpose of commercial banks, the function that makes them banks, is making credit evaluations. Any company which takes on that function without the accompanying risk if the loan is not paid off, is in a moral hazard situation which will ultimately create a credit bubble. I'm not sure which of these does that, but worth keeping an eye on.
"I'm not sure which," Winterspeak says.
No matter which. They all create debt, so they all contribute to rising financial cost. They all increase costs for the producing and consuming sectors. At any given interest rate, the cost of finance varies with the level of debt accumulation: the more debt, the higher the cost.
It should be obvious that as the cost of finance increases, the break-even point for new borrowing also increases. It takes little borrowing to equal the financial cost of a small debt. But it takes a lot of borrowing to equal the cost of a massive debt. The break-even point is how much we have to pay to service existing debt. When new borrowing is less than the break-even point, the boost from borrowing is less than the drag from existing debt. Only above the break-even point does new borrowing boost economic growth.
When debt is large, high levels of new borrowing are required just to reach the break-even point. But high levels of new borrowing make a big debt bigger, faster, and push the break-even point even higher. This is a scenario that cannot end well.
The problem is not borrowing, really. The problem is that we let borrowing accumulate as debt. The only policy we have that ever slows the growth of debt is raising interest rates to fight inflation. But raising interest rates increases the cost of finance and pushes the break-even point up more. This cannot end well.
An alternative would be to implement a tax that varies with taxpayer indebtedness. The tax rate could vary with the taxpayer's debt-to-income ratio, for example. In a booming economy the tax could be punitive, if Congress really wanted to do that; for a troubled economy it can be designed to help people reduce their debt, providing tax credits for accelerated debt repayment. Either way, it would be using fiscal policy to do something that until now has only ever been monetary policy.
The Accelerated Repayment Tax would work like raising interest rates, but only for people excessively in debt. For everyone else, it would be like leaving interest rates low. This is a two-pronged policy that can encourage growth and fight inflation at the same time. It brings far more finesse to policy than you get from jacking up rates.
The particular meaning of "excessively in debt" would be determined by the wisdom of Congress. The chosen "max debt" level would soon become a standard among taxpayers, and a standard for society. Congress will surely want to choose a level that provides maximum economic vigor.