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1 lostlakehiker  Fri, Aug 5, 2011 1:28:15pm

My nostrums include debt forgiveness. People who have taken on so much debt they'll never be able to pay it off are bankrupt. Pretending they're not achieves nothing.

What kind of debt are we talking? I'll talk about housing debt. That's the kind that runs into really big numbers, and where we cannot fairly say that it's the debtor's own damned fault. Fingers can point in many directions with this society-wide fiasco.

If they're broke because they owe too much on their homes, it makes sense to look at what the home is now worth. If it's not worth much, then writing down their debt to the appropriate fraction of its new and lower value might be a better deal for all than standard bankruptcy and eviction.

To whom will the new owner sell that house? At what price? How long will it take? All good questions, which is why keeping the old owner in the property at a reduced price might be a good decision.

People who cannot make the payments on homes that are still worth something like what they paid for them should just go through ordinary bankruptcy, vacate the homes, and free them up for somebody who can pay. The bankrupt person has lost nothing that was ever really his, and the bank hasn't lost all that much on the failed transaction.

Oh, and I have read "This Time It's Different". A wonderful title and a fine book. Of course the point is, no it isn't. But a ripping good bubble requires a suspension of rational disbelief in trees that grow to the sky, and history records that we fall for it again and again.

2 RoadWarrior  Fri, Aug 5, 2011 1:46:36pm

Foreclosure and bankruptcy are our existing free-market mechanisms for debt forgiveness.

We do not require additional mechanisms for debt-forgiveness.

The purposes of forcing foreclosure and bankruptcy are:

1) they impose a cost on those who claim they cannot pay (foreclosure and bankruptcy are painful and that's a cost to the debtor, even when the debtor has no cash available to bear cost)

2) by imposing a cost, they provide for a screening mechanism that eliminates a goodly number of special pleaders who may falsely claim they cannot make payments

3) outright debt forgiveness without foreclosure and bankruptcy raises the expectations among borrowers quite rationally, increasing the likelihood and willingness for them to become over-indebted and to make imprudent investments / purchases in the future

4) foreclosure and bankruptcy appropriately mar the record of the bad credit, hampering their ability to over-borrow in the future by blackballing them. Benefiting from debt forgiveness would not stain the record of the borrower sufficiently or, necessarily, obviously.

Professor Reinhart's objective of moving things forward and putting the past behind us could better be achieved by forcing banks to mark down bad assets according to independent outside appraisal (not conventional accounting audit, where the auditor is bank-selected and where the auditor review accounting methods more so than valuations proper).

Marking down bad assets ensures that banks appropriately recapitalize and remain liquid enough to engage in new business. And that's the objective.

3 Daniel Ballard  Fri, Aug 5, 2011 2:11:38pm

Well said Reine. He is treating debt forgiveness as a possible tool to assist the economic growth post bubble. Makes sense.

4 freetoken  Fri, Aug 5, 2011 3:10:20pm

The Peterson Institute is usually thought of as a "conservative" economic institution, though they are not part of the wingnut crowd. If they are talking about wide scale debt forgiveness then I take it as a sign that they are convinced that home ownership and mortgages are still supposed to be the foundation of our personal economies.

It is something with which I disagree, and while I do think there is much to investigate and regulate wrt debt, especially interest charged for debt, including on mortgages, I'm now convinced that the goal of very high home ownership in the US runs counter to a key aspect of American lifestyles that we so highly embrace: high mobility every decade. IOW, Americans like to move around and not stay in one place, and owning one's own dwelling place only makes sense if one is willing to stay there for a good chunk of ones life (more than a decade.)

Also, the idea of using real estate equity as a revolving charge account is part of the "aspirational" lifestyle - when I was a kid we used to call it "living above one's means". I remember here in the San Diego region seeing a plethora of new automobiles (higher end makes) around 2002 and 2003, in neighborhoods where it wouldn't be expected. It was just part of a great blow-off of equity - note how car sales plummeted after the peak in home prices.

So, I'm not sure I'm on board with Reinhart here, unless she has some larger proposals on how to affect American lifestyles.

5 jvic  Fri, Aug 5, 2011 4:44:19pm

Remember the "bankruptcy reform" of a few years ago, lobbied for heavily by credit card issuers like MBNA?

The net effect was to make it harder to discharge debts in bankruptcy; it became easier for credit card issuers to keep their hooks in a defaulting consumer indefinitely (thereby reducing their need to perform due diligence on credit applicants. Iirc the banks sought, but did not get, the right to seize defaulting consumers' retirement assets.) Now here we are with an overhang of bad debts impeding recovery. I'd bet that the bank CEOs who did the Bush-era lobbying have meanwhile retired with at least eight-figure net worths.

Heckuva job, George. Again.

6 Our Precious Bodily Fluids  Fri, Aug 5, 2011 5:14:02pm

re: #2 RoadWarrior

Foreclosure on the massive scale we're looking at affects other people who, until half their neighbors fell into foreclosure, were doing fine. If you bought a house -- well within your means -- five years ago, and now it's devalued to the point where you're now upside-down on it through no fault of your own, well that's your tough shit. Mourn for your equity and the good old days, and best of luck if you have to try to sell it for some reason.

7 steve_davis  Sat, Aug 6, 2011 5:46:42am

re: #5 jvic

Bingo, jvic. I was just thinking about that myself. Ironic, isn't it, that bankruptcy reform was a Republican initiative, in spite of the fact that the manner in which it is set up now means that it is much less likely that "small businesses" will be created, thanks to the additional financial hazards an unsuccessful business would run into. I'd love to start an unincorporated business, but I'm damned well not going to risk bankruptcy over it. I wouldn't mind the bankruptcy, but having the courts order me to attend some (*&^%^ workshop to get lectured to about financial responsibility would probably cause me to go postal.

8 RoadWarrior  Mon, Aug 8, 2011 12:00:45pm

re: #6 negativ

That's correct, Negative.

We are all in the same boat.

And when that boat sinks, there is nobody to go and cry to.

So quit your crying.

9  Mon, Aug 8, 2011 12:59:02pm

re: #7 steve_davis

re: #8 RoadWarrior


I think it's quite unproductive to blame Republicans for this or that, or Democrats for this or that. None of that matters right at this moment. GWB boo hiss! Barack Obama boo hiss! And . . . what changes? Nothing.

What matters right at this moment is that we are in a helluva mess; and what is to be done to get it right?

My concern about any plan, anybody's plan, R or D, or whotheheckever, is this:

When everything is said and done and the rich and the better off have paid their fair share toward keeping things moving along (and "fair share" will have to be increasingly bigger portions as the rest of us become poorer) , and we're all equally badly off, who then are we going to look to for doing the bailing?

I admit I'm hopelessly lost when it comes to discussions about the economy, so I have no clue what will (or should) work vs. what won't work.

I just hope somebody steps up who can figure it out.

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