Now we come to the "heartless fiend" portion of our discussion of the weaknesses inherent in both Keynesian and Austrian economics as a result of both systems' reliance on existing accumulations of savings to finance new capital formation. At the risk of once again opening up a can of worms, what's the story on creating money for such things as student loans and home mortgages? Are loans for such purposes good debt or credit, or bad debt or credit? Does such a thing as "good debt" even exist?
"Good" debt does exist, but we must be careful of the words we use. "Good" debt is any credit extended to finance something that, directly and in and of itself, generates its own repayment by making a stream of profit on the production of marketable goods and services. Thus, credit extended to purchase a shoe factory would be "good debt" if the assumptions used in determining whether or not to make the investment were good.
"Bad" debt is any credit extended to finance something, directly and in and of itself, does not generate its own repayment. The purchase may be essential, such as for food, clothing, or shelter, or it may be for something that increases or maintains future earning power, such as education or health care, but if the item(s) or activity does not, in and of itself, and as a direct result of the use of the item or participation in the activity, generate profits, the debt cannot be considered "good."
Credit extended for speculation, that is, not in anticipation of the stream of profits to be generated by the marketable goods and services to be produced, but in anticipation of changes in the value of the asset itself, is "bad" credit. Purchasing a home for more than you can currently afford in anticipation of a rise in the value of the home is speculation. Securitizing the mortgages made for speculative purchases constitutes drawing "fictitious bills," and is fraud — the present value of any asset is either its current market value, or the discounted cash flow of the stream of profits realized from the reasonably anticipated future production of marketable goods and services. Valuing any asset in excess of either of these two estimates is "overtrading," i.e., issuing securities or promissory notes against something that does not exist.
Credit extended for the purchase of a home or to finance education is "bad" credit in that neither home ownership nor education ordinarily produce directly marketable goods and services. It may be expedient, even socially essential that credit be extended for such things, but the funds should always come out of existing accumulations of savings, even if it requires a special tax levy. Money should never be created to finance anything that is not directly productive.