Let’s say you could get a loan with a 7% interest rate.

Let’s say you could find an investment that would earn 10% interest.

What should you do?

The math is pretty easy.  You should take out the biggest loan anyone will give you (that you can afford to service in the short run) and sink it all into the investment opportunity.  Your interest earnings swamp the rate on the loan.  Every penny you borrow is a little profit generating machine.

The logic is unassailable.  If you’re presented with a scenario like that, the math points you to a clear answer.  Borrow.  Borrow.  Borrow.

And let me tell you, everyone and his or her dog would love to find that situation.  Finding anything that guarantees a reasonable rate of return over loan interest is impossible to resist and hotly pursued.

Which is why people come up with ideas like borrowing money (whether it be via a home equity loan or a standard margin buy) to buy stocks.

Everyone is telling us that it’s a buyer’s market.  We all know that today’s beaten stocks will rise like the Phoenix to recapture most, if not all, of their previous glory.  We can get them for pennies on the dollar right now.  It’s the perfect time for a shopping spree.

If you can dig up a decent loan from any source, you should be throwing that money at the market with both hands as fast as you can.  That’s what some people seem to believe, anyway.

I think it’s crazy.

The math only works on our hypothetical because of the word “guaranteed”.  It makes sense to load up with maximum debt if you really and truly cannot lose.  Cannot.  Can’t.  You know, as in “it would be impossible to lose money”.

That’s a lot different than the belief that the stock market will rebound.  One is a guarantee, the other is what people think.  If you haven’t noticed lately, what people think and what they get are often quite different.  People had great thoughts about the market a year ago and now they open their 401K statements with one eye closed.  Sen. Lautenberg and Steven Spielberg had great thoughts about Bernie Maddof.  We’ve seen how that worked out.

Basically, the idea of saddling yourself with a high debt burden in order to purchase (or to leverage the purchase of) stocks evinces a kind of hyper-optimistic assessment of the markets that completey ignores the potential downside of miscalculation.

If you take “guarantee” out of the plan and replace it with a smart assessment based on the current state of the markets, the idea of borrowing money to buy stocks borders on pure goofiness.

The proof of that, by the way, is all around you.  Grab a paper from last month when people were starting to sing this chorus of “buy value stocks while they’re cheap”.  Now, pretend like you took out a second mortgage on your home to buy stock in your five favorite companies.  Pull out today’s paper and get an idea of where you’d be.

Unless you’re one helluva a stock picker or a liar, it’s probably a scary propostion.  If you’re still not convinced, ask the people who tried this technique in 2007, before the markets went tumbling.  How do you think they’re feeling these days?

Look, no one is sure of the bottom right now.  There are many historically stable industries who are staring down the barrel of disaster.  Meanwhile, the markets are insanely volatile, bouncing up and down like a Cirque performer on a pogo stick.

This is not the time to risk a bigger and badder debt load (if you could find a lender in the first place) on a hunch that things are going to get better in a hurry.

No one is stopping you from buying stocks, mind you.  I’m not opposed to that.  I’m opposed to risking your home, credit rating and assets in pursuit of a loan that carries significant short-run risk and a potential of long-run problems, too.

It’s probably true that stocks are a long-ranger winner.  If you could service a loan properly and have great stock picking skills, you probably could make money by borrowing cash for stock buys.

It just wouldn’t be worth the risk.  You have to measure upsides against downisdes.  This time, the downside is just too darn ugly.