In “Time for a debt jubilee?”, Associate Editor Gil Smart writes:
“…Some suggest an end run around this mess. Kain quotes Stephen Roach, economist and senior executive with Morgan Stanley, who in August said a debt jubilee — essentially, the cancellation of consumer debt — would help Americans get through “the pain of deleveraging sooner rather than later.” Once those debts are cleared, people can begin spending again. And think of the psychological burden lifted; that’s a great untold story of the downturn, the anguish this economy has caused families… …
“There could be other consequences. The Federal Reserve — seeking to save the banks, as always — might continue its “easing” policies, to ensure the financial institutions that suddenly get stiffed are adequately capitalized. If consumers and banks are both suddenly flush, it might spur new lending, not to mention more speculation. We’d get more bubbles. And we’ve seen how well that turns out…
“The reality is that there isn’t enough money to help both the banks and the people. Look at Europe, where the banks are to be recapitalized and the people must endure “austerity.” That’s coming here, by the way. Won’t it be fun?”
WATCHDOG: Five years ago we told friends that Smart needed a year or two of graduate studies at Harvard to achieve his potential. Now we are impressed on how, on his own, Smart has further educated himself over the intervening years. His columns merit syndication.
Nevertheless, Smart should be aware that under TARP and through virtual bank subsidies from the Federal Reserve we did “recapitalize” our banks and we certainly have been enduring “austerity.”
While forgiving all debt is not feasible, it would seem to make perfect sense for mortgage lenders to agree to reduce the principle and interest on homes where they are owed more than the market value of the house. Reportedly, foreclosure and resulting repairs and maintainance cost them still an additional 30% loss.
The problem is that it is relatively rare for an institution to own the entire mortgage since they usually had been sliced and diced into tranches and sold as parts of securities. Furthermore, recognition of market value would destroy the mythical capital base of many financial institutions, causing the survivors to minimize lending and plunging many into bankruptcy. That would likely trigger another great depression.
This is why Paul Volker told the Charlie Rose audience that debt deleveraging will likely take another five years.
During the first couple of years of this steep recession, people sought to maintain aspects of their life style. Today with rising food and fuel prices, lower earnings, and high unemployment and underemployment, many are recognizing that they need to move down a few notches in their life style.
The Watchdog notes a ‘doubling up’ and ‘downsizing’ trends in the apartment industry.
While the USA standard of living and investments in the future decline, China, India and other nations make rapid progress. If not already, we are on the cusp of becoming a second tier nation. Our young people already face a second tier future. Even those who are enjoying the unprecedented earnings of the top 1% need to note this because, while they may be living the ‘good life’, prospects for their children and grandchildren look dim.
Moral hazard. So you want to reward those who lived beyond their means? Is this the behaviour that society should be encouraging?