In a great book “The Road to Financial Reformation”, the author, Henry Kaufman, writes on the debt deluge.

“How did this enormous growth of debt come about, and what is sus­taining it? Merely to blame the incorrect policies that fueled inflation is too easy; there is much more to the debt explosion. I have written at length about the underlying causes of the surge in debt. For this discussion, let me summarize with the following seven points: the atti­tude toward debt, financial deregulation, financial innovation, securiti­zation, financial internationalization, the tax structure, and practicing debt prudence.

1. The attitude toward debt has been transformed from a hesitancy to borrow in the early post-World War II period to an intense use of credit in recent years. This attitudinal change reflects the declining influence of those who experienced the Great Depression of the 1930s. Indeed, despite a number of significant financial crises during the past 20 years, only relatively few institutions failed. Today, no one celebrates paying off the home mortgage. Now, corporate financing strategies do not differentiate between money and credit or between liabilities and liquidity.

2. Financial deregulation, regardless of its merits, still facilitates the creation of debt, because it spurs competition and reinforces the drive for new markets and enlarged market standing. Credit growth was more inhibited when markets were more compartmentalized and institutions were more restricted in their activities.

3. Financial innovation, by its very nature, either facilitates borrowing that could not have been financed at all using earlier techniques or is utilized to reduce financing costs. Perhaps the most far-reaching of the many changes that have been introduced in the past few decades has been floating-rate financing. This technique enables financial institutions to try to insulate themselves from the interest rate risk by quickly passing on increases in the cost of their sources of funds to their borrowers. In the past, a move toward higher interest rates curbed debt growth because financial institutions could not easily pass on the higher costs to their customers. But with the advent of the pass-through device of the floating-rate note, financial institutions have become aggressively more entrepreneurial and growth oriented than in the past.

4. Securitization, which transforms obligations from nonmarketable to marketable, has encouraged debt growth in several ways. First, it tends to create the illusion that credit risk can be reduced if the credit instruments become marketable. Holders of the marketable obligation frequently believe that they have the foresight to sell before the decrease in creditworthiness is perceived by the market. Second, the enhancement techniques employed in securitization, such as credit guarantees and insurance, blur the credit risk and raise the vexing question, "Who is the real guardian of credit?"

5. Internationalization of finance has also enhanced debt creation. Today, major corporations and official and private institutions seek the best terms by borrowing in Europe, the United States, and Japan. Rapid advances in communications and technology, together with financial deregulation abroad, have intensified competition among key financial centers. In view of the differences in the degrees of deregulation, regulatory requirements, and accounting standards, the opportunity to generate debt is very great indeed.

6. Our tax structure is another factor that encourages the use of debt over equity. Interest payments are generally tax deductible. Although this preferential treatment may be curtailed somewhat by the proposed tax reform, dividend payments are still subject to double taxation, and the levy on capital gains may be raised.

7. Practicing financial prudence is virtually impossible for major participants in our financial system. Even the best compromise. For business corporations, this may happen through the use of greater leveraging in order to avoid a takeover. As I have noted in my book Interest Rates, the Markets, and the New Financial World (Times Books, 1986), "If (financial) participants fail to adapt to the new world of securitized debt, proxy debt instruments, and floating-rate financing, then they lose market share, make only limited profits, and do not attract the most skilled people. The driving force behind profit generation is credit growth."”