Seth Klarman on our debt culture

Seth Klarman is one of the most lucid writers on value investing i've ever come across. Here he puts the credit troubles in perspective, by comparing the borrowing culture of today's generation with those of our forefathers:

" We live in an era of leverage not just on Wall Street but on Main Street. For two generations, credit has become much more widely available and acceptable. In our grandparent’s era, there were no credit cards, home equity or subprime loans, or CDOs. People paid cash for what they purchased, and worked hard to earn that cash. The sequencing of that mattered, too: first you worked hard, then you bought what you wanted. Even the federal government was expected—except in times of war—to run a balanced budget.

But during our parents’ lifetimes and our own, credit has become increasingly available and standards increasingly lax, to the point where credit cards and checks backed by credit lines arrive unrequested in the mail, where your house can be used as an ATM, where people with dismal credit histories are eagerly sought after to provide them with loans, where investors flock to buy junk bonds and shaky companies seek to issue them, and where investment funds are offered the opportunity to enhance their return through structured products, derivatives and exotic financings, all of which embed high amounts of leverage.

The moral imperative of repaying the banker—your neighbor—who granted you the loan across his imposing desk has been replaced by the moral vacuum of anonymous lenders using credit scoring—who quickly resell your loan to someone you will never meet—and who are actually comfortable with the actuarially determined probability that you may default. Credit rating agencies have embraced the debt orgy with lax standards and naïve models, brewing conflicts of interest and accepting healthy fees to label toxic waste as investment grade."

Here's a 2005 letter by Seth Klarman bemoaning the intense competition for stocks ("Fans of Warren Buffett now fill a sports stadium when they flock to Omaha in May for the Berkshire Hathaway annual meeting."), the consumer debt bubble, housing bubble and the need to conserve cash because of the impending correction in the markets.