Time for debt forgiveness?

[Sheilbh]

That said, we might already be at the stage where defaults for important states are unavoidable. But, with the articles attitude, we can safely note in our schedule the next identical crisis in a few decades

I think the article's point is that actually some measure of debt forgiveness would be better for creditor and debtor than no debt forgiveness and possible eventual default.

And the point about creditors being somewhat culpable is, I think, entirely fair.

[Zanza]

Where did you get that?  I don't think what the author's suggesting or talking about.

How do you think this part works?

[...]governments should "mandate debt forgiveness." They could buy bad loans from lenders[...]

[Sheilbh]

Where did you get that?  I don't think what the author's suggesting or talking about.

How do you think this part works?

[...]governments should "mandate debt forgiveness." They could buy bad loans from lenders[...]

I think through normal government spending.  The IMF recently did a report on household debt and suggested that governments like Ireland, the UK and the US should look at policies FDR had on this in the 30s - and I believe that Iceland's done recently.

It would need to be targeted but by the time FDR's program was wound up it had turned a profit.  My view would be that it'd be like TARP for households.

[Zanza]

How do you think this "normal" government spending can be financed?

[Viking]

The Lannisters disapprove of this thread. This isn't fair to those of us who pay our debts. Moral Hazard and whatnot.

[Tamas]

That said, we might already be at the stage where defaults for important states are unavoidable. But, with the articles attitude, we can safely note in our schedule the next identical crisis in a few decades

I think the article's point is that actually some measure of debt forgiveness would be better for creditor and debtor than no debt forgiveness and possible eventual default.

And the point about creditors being somewhat culpable is, I think, entirely fair.

What is stopping them from making deals on that? What shouldn't happen is government deciding which contract is gospel, which is toilet paper. Because, you know, government consists humans driven by their indidivual needs and interests.

[Admiral Yi]

How do you think this "normal" government spending can be financed?

Exactly.  If the governemnt buys up debt and forgives it, it's Keynesian stimulus under a different name.  If government mandates private sector foregiveness of public debt, that's called default.

[crazy canuck]

The Lannisters disapprove of this thread. This isn't fair to those of us who pay our debts. Moral Hazard and whatnot.

What is your view on Bankruptcy laws which also function to forgive the debtor?

[Sheilbh]

How do you think this "normal" government spending can be financed?

Sorry I thought by printing money you meant it was monetary not fiscal policy.

For countries with high household debt that's holding back the recovery this is a relatively cheap way to address the problem.

What is stopping them from making deals on that?

The IMF cite the example of Iceland - this was the other side of their letting the banks fail.  They had an IMF supported program to deal with household debt because it was so large a problem.  So to begin with there were temporary measures like the rescheduling of certain mortgages (CPI and foreign currency) and a moratorium on foreclosure.  Then people were allowed to try restructure their loans entirely out of court with an ombudsman - this was done on a case-by-case basis so it preserves some moral hazard.  That was very slow, so 'To speed things up, a debt forgiveness plan was introduced, which writes down deeply underwater mortgages to 110 percent of the household's pledgeable assets. In addition, a large share of mortgage holders receives a sizable interest rate subsidy over a two-year period, financed through temporary levies on the financial sector'.  They estimate that between 15-20% of mortgages are in some stage of being written down.  It's still early but this probably part of the reason Iceland's recovery is doing well is because a way out.  They avoided a short-term spike in foreclosures and have allowed debt restructuring that stops household debt acting as a drag on the economy.

What shouldn't happen is government deciding which contract is gospel, which is toilet paper.

I don't think that's an accurate description of the idea here.  But of course the government does decide which contract is valid and which isn't, it's done through legislation or the courts and it does change in the face of other considerations. 

This isn't fair to those of us who pay our debts. Moral Hazard and whatnot.

If we'd not already had to bailout or nationalise the creditors I'd have a lot more sympathy with this argument.

But the IMF suggest that some problems of moral hazard can be avoided to some extent by steps like limiting to people with debt greater than 110% of household's assets, or in previous US programs to households already in default.  So those households were only going to leave the lender with a total loss and default while the bargain collapsed.  One option they suggest is having a general speedy process for cases in which a write down or default's inevitable and a more lengthy case-by-case system for more complex or dubious cases.

I think this is like the opposite of Obama's suggestion (cribbed from Romney's advisor) about helping households who are in negative equity but still paying the mortgage.

What is your view on Bankruptcy laws which also function to forgive the debtor?

I don't know about this but my impression is that European bankruptcy laws tend to be far more punitive and slow than American ones.  I've read a few articles about the government wanting to move towards a more American system.

Edit:  This speech by the head of the NY Fed seems interesting and a bit more specific to the US than the IMF can be:
http://www.newyorkfed.org/newsevents/speeches/2012/dud120106.html

[Tamas]

They didn't "have" to bail out the creditors, they just chose to.

[Ideologue]

Moral hazard is a song that's been overplayed.  Sure, that's what people do, buy houses and cars and law degrees and just walk away laughing to the BK court.  Have most economists ever moved a couch?

[Tamas]

Moral hazard is a song that's been overplayed.  Sure, that's what people do, buy houses and cars and law degrees and just walk away laughing to the BK court.  Have most economists ever moved a couch?

If you want ground-level stories on moral hazard, take the mortgagers in Hungary. A vast majority took their loans in foreign currency. Enjoyed very-very low payments for years, compared to the Hungarian forint rates. A minority was worried about owning in a currency they don't have income in, so they took the high interest on their chin and payed the forint rates.

There came 2008 and whatnot, a lot of foreign-currency debt holders were in big trouble. The government have gone out of it's way arm-wrestle the banks into a lot of easings, in part by tax-money support. But even during the worst days of the crisis, the foreign-currency holders faced no worse rates than they would had, had they taken the same amount of loan in forints.

So there you go, careful, risk-averse planning punished, reckless irresponsible gambling rewarded. That is what apparent throughout the entire world economy, and I can spell the reason for it very easily:
state interventionalism

[Sheilbh]

They didn't "have" to bail out the creditors, they just chose to.

Fair point.  But that doesn't change the point that moral hazard flew out the window when we bailed out the bad creditors.

That is what apparent throughout the entire world economy, and I can spell the reason for it very easily:
state interventionalism

Two questions immediately spring to mind.  Why were there significantly fewer financial crises before deregulation in the 80s - during the Keynesian heyday of the short post-war?  Why is it that the interventionist, heavily statist countries of Northern Europe had a better recession and are having a better recovery than the swashbuckling free marketeers of the UK, the US and Ireland - just a few years ago all held up as admirable models for countries like Germany, the sick man of Europe?

[Scipio]

Chreon apokope!  Ges anadesmos! Panem et circenses!  A chicken in every pot, and a car in every garage!

I didn't include forty acres and a mule, because, well, let's face it, the Freedmen's Bureau fucked up a lot of shit.

[Neil]

Fair point.  But that doesn't change the point that moral hazard flew out the window when we bailed out the bad creditors.

Indeed.  I can't believe that people are talking about moral hazard as if it was a real concern anymore.  Laissez-faire is long dead, and it's not going to be coming back so long as there is still civilization.