Comment

Another Conservative Economist Goes Rogue

2
RoadWarrior8/05/2011 1:46:36 pm PDT

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.