Some observations motivated by the debate.
1) It seems to me that a financial system that is heavily based on debt tends to be unstable. Many of the legal barriers that held the banking industry in place after the crisis of the 30's, and that were essential for the economic growth of the west after WWII, have been removed. Indiscriminate lending is leading to an increasing number of bankruptcies and foreclosures, as it was recognized by the Fed Chairman this week.
2) I don't agree with the statement that credit creates wealth. In my opinion, a more truthful one is that credit is a vehicle of wealth transfer (to the banks). Although one can find ventures whose gains offset the cost of the credit (plus taxes), these tend to be highly risky for the common investor.
3) Having a "rainy day" fund does not avoid emergencies. However, it can buy you some peace of mind, give you more options on a crisis, and damp its effects on your life. Assuming that life has no emergencies is ludicrous and unrealistic.
4) One problem with the cash flow projections that many real estate investors make is that they are overly optimistic. Many people use vacancy rates that are inappropriate for the market reality, don't react promptly to local market fluctuations, and in the case of those with a mortgage, have little or no room for lowering the rent (to attract new tenants) without going in red. A landlord that owns the property can be more patient with the market, has more freedom to lower his margin, and can take a loss without affecting other investments or his personal finances.
In the end, debt can give you a temporary advantage, but cash can give you the freedom to offset it and win in the end.
Pat
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