David Merkel submits: There has been a significant shift in bailout psychology over the last week or two.  The grand shift has been to make the cost of receiving money from the U.S .government smaller, which gets “banks” to line up for…

I was just reading about capital structures in my corporate finance book and noted that for tax reasons, the marginal cost of capital actually decreases as companies add financial leverage up to a point of some optimal capital structure (effectively, capitalizing a company with debt increases its value to a certain point).

It seems like government policies such as this actually encourage unstable balance sheets. I think that you have mentioned in the past how the ability to write off mortgage interest on personal taxes encouraged people to borrow money to buy homes in a speculative market.

In fact, the more I look, the more it seems to me that a large portion of government policy enacted over the past 30 years encourages debt financing by businesses and people. The banks must be incredible lobbyists.

It seems like eliminating the tax advantage of debt financing could foment a more stable financial system.

Absent some pro-growth policy suggestion like lower taxes or regulation (which no one is promoting), we left with only a bad outcome?

Rusty

I think alot of amatuers like myself who have managed to move some of our retirement money into short term treasuries know that the money cannot stay there forever at < 1% yields.

Do you see corporate bonds as a “trade” or a longer term investment? Do you see future inflationary pressure as something that would then cause a trade out of those same bonds down the road? Thanks for your insight.