Trillions in Bad Loans May Sap World Economy for a Long Time
nytimes.com
nytimes.com
The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place.
The intention is to throw people a rope to save them from drowning, but the rope is ending up as a noose around their neck more than anything else. The government's may have had good intentions in their support for the proliferation of subprime lending, but I think it would've been more effective to just give people money without the expectation that they pay it back directly. It will find its way back into the economy as, so to speak, trickle up economics.
The idea of a "debt jubilee" is definitely something that's been discussed before by economists and philosophers.
One big issue is that there are other people on the other side of those debt cancellations that would get hurt.
For example, it's terrible that young adults have massive college loans to pay back. Some are kicking around the idea to forgive those loans. But there are also creditors as well. Think of grandparents who have a 401k for retirement. Through the interconnectedness of the financial system, a component of their retirement income will depend on payback of those "bad" college loans.
Will those senior citizens happily vote for a debt reset if they know their retirement savings get reduced? Seems doubtful.
The way to sell the idea of debt forgiveness is to convince the creditors that it's impossible for the debtors to pay them back. Therefore, take a financial hit now instead of later so the economy can get moving.
Also, the artificiality of the debt--and the idea that a jubilee won't really hurt the creditors--is put into striking relief by the Rolling Jubilee. Right now, people are already buying that bad debt for pennies on the dollar, just to wipe it out. I'd like to see if anyone's modeled what would happen if that behavior were just turned up to 11, who'd be harmed, etc.
Oh no no... I don't want people to picture an old hag sucking the blood of infants.
To clarify, I was using "grandparents" as a single example to humanize what a "creditor" was. We have met the creditors and they are us.[0] When society complains about the unfairness of student loan debt, we tend to think of the creditors as something abstract and invisible.
The total student debt is ~1.3 trillion[1]. If forced to picture who is owed that money, maybe college kids would think of some evil mustache twirling CEO of Goldman Sachs or Chase Bank. Sure, some fraction of a fraction of the interest payment does go to executives like them but the vast majority of the money goes to us.
That 1.3 trillion is diffused throughout the economy. The pensions of police officers, firemen, and teachers. The car insurance premiums we pay is priced a certain way based on investments that point to those college loans. Etc etc.
At the moment, the struggling college grads are "visible" and the creditors seem "invisible" but trust me, if a political movement gathers steam to ask Congress to forgive those loans, all those invisible creditors will come out of the woodwork at Congressional hearings and fight it.
Trying to convince millions of us to zero out the balance sheets for those student loans will be a huge uphill battle.
[0]riff on: https://en.wikipedia.org/wiki/Pogo_(comic_strip)#.22We_have_...
[1]http://www.marketwatch.com/story/every-second-americans-get-...
As it stands, money never really sits around doing nothing. It's on some banks balance sheets and so it's loaned out, then repackaged and sold to organizations seeking safe places to park money. This repackaging of debt has been a huge boon to the US economy in the short term. But, it's only a long term gain if people actually default otherwise it's just a long term drain for a short term boon.
The wider problem is there is more 'money' than productive usage for that money which means bad loans, and wealth destruction. Arguably the solution is to have money sit around without being loaned out.
Firstly, the debt burden is only diffused because those "mustache twirling CEOs' decided it should be.
Pensions used to work just fine before they were financialised by sharks. So did insurance.
No one sane should be trying to increase the returns on a pension fund by gambling on student debt, on real estate loans, or on consumer credit.
That was exactly the approach that caused the implosion of 2008 - or more specifically, it was "mustache twirling CEOs" hiding the fact that the investments they were selling as a sure thing were junk loans with a cheap wood veneer.
Secondly, even if this wasn't true, the social and economic costs of an economy that runs on usury instead of productive investment are so predictably crippling that the hair cut, with associated uncontrolled demolition, will happen anyway.
A debt jubilee would do a lot to restore confidence, because everyone will be able to stop looking nervously at everyone else's obligations and wondering if they're going to be able to meet them. Instead, some realism will be restored to book values.
This would still be cataclysmic, because the financial industry needs to understand that it can no longer run on cocaine and bullshit.
But it won't be the financial equivalent of a self-inflicted nuclear strike, which is a real possibility as things stand today.
Oh yeah, I'm sure the creditors will be highly confident about future lending after a jubilee, because they went from wondering if debt will be repaid...to knowing it won't.
Where do people come up with this stuff?
I'll bet most of them already know. Start with nothing, work hard, save money for retirement, lend it to entitled students and have them not only stiff you, but also spit in your face.
That seems fair.
Let's hold the boomers+ to the fire. And the banks.
There are going to be some disappointed Boomers in the next decade, when looking to sell their main asset, upon discovering nobody can or will pay their inflated prices.
Additionally, anyone making loans is already considering the risk of a debt jubilee when making loans now. After a debt jubilee of course the risk of recurrence is higher, but the risk assessment for banks would not be magnitudes different in the medium term.
There's few good options at societal scale. One of them is to get the right to extract valuable resources and sit on them until later - this is what Norway's doing with their North Sea oil. The other is to make things, and trade them for promises to make things later. This is one of the huge fundamental forces acting to make debt for the young generation easier and cheaper - the previous generation needs to do things now to convince them that they need to part with their work later.
It's not an error, it's there by design. The only way to get retirement savings on that massive of a level is to make things for people who can't afford them (yet).
It's a "cruel error" to lend somebody money?
Do most 401Ks really invest in student debt?
https://finance.yahoo.com/q/mh?s=SLM+Major+Holders
Much of the other 75% is I'm sure also distributed into many other common mutual funds that are used in people's 401k plans.
It's trillions of dollars, and every penny of it is held as an asset on someone's balance sheet. Do you think it's confined to "greedy bankers"?
A risk they assumed when they decided to put their capital to work. I don't actually have any debt myself so I don't have a dog in this fight, but if you have the money to purchase risky assets in expectations of earning a coupon then your necessities are already covered. Between people who don't have enough to live with dignity and people whose investments don't pan out, most of my sympathy goes to the first group.
The real problem is that the banks are allowed to take risks without paying the price for these risks when they do not pan out. We have set a precedent that the large financial institutions are too big and too important to fail, and thus they may operate with quasi-impunity knowing that they might have to cut some junior employees/restructure/spin off some divisions in the event of a downturn, but that the revolving door between the public and private realms will always be open, through which both taxpayer money/credibility and new jobs will always flow to those at the top. Nobody will go to jail for being a self-interest optimizing sociopath because our legal and economic system is set up to favor corporations and those with the money to thoroughly defend themselves rather than society as a whole.
Perhaps we can agree that there isn't enough transparency on the creditor side. You and I are creditors in that we have 401ks or money in pension funds. Do we know what is happening with that money? Not really.
Is it then fair that we have to take a haircut on our (guaranteed safe) savings if a bank screws up our investments?
Lumping the two cases together is an unjustified equivocation.
Realistically, you're right about debt having two sides... but one side is typically far more in the hole than the other.
Obviously, if the government could be metaphysically certain of the loans that would never return another penny and only cancel those, there's no net loss to the bank. But there's no net gain to the borrower other than a potential psychological effect.
Risk of government-sanctioned default is the same as any other default risk, and will be priced into interest rates, hurting especially those with marginal credit whom the banks judge most likely to be the "beneficiaries" of some future forgiveness.
Now banks think they can get rid of that concept too. They want loans to be insured by governments so there will never be defaults and they can simply mint money?
The end result of the monster that became blew up in 2008, after people took it far, far, far too far.
The hard problems are hard, mainly because you can't see the effect of an action until it's far too late.
Calomiris/Haber wrote a book explaining this. Recommended.
We can resort to a sort of grumpy, Congregationalist/Calvinist mentality but then stuff goes undone and people are poorer. Value should come from value, not suffering.
Yeah, and in the most recent cases that was somebody's home, for which nabbing that collateral was controversial.
>Now banks think they can get rid of that concept too.
Banks are pretty good at assessing loan risk. You don't think so? Go try to get a small business or unsecured loan.
This seems to be the opposite with student loans. The government has backed those and will not allow them to be dismissed in bankruptcy and all that, yet those loans have some of the highest interest rates around.
Is that just based on the lack of collateral? I mean a person could die and then it will never be repaid. Homes are required to carry insurance, so the risk of destruction is covered. Is that what it is, or are they just screwing people over? These are just questions, I have no skin in the game ATM and hope my kids can avoid it as well.
Imagine you're a bank calculating the interest rate to offer on a loan. Do you think that rate will be lower or higher if you believe there are circumstances wherein the government would unilaterally forgive your bad debts if your customer defaults?
Imagine you're a bank calculating the interest rate to
offer on a loan. Do you think that rate will be lower or
higher if you believe there are circumstances wherein the
government would unilaterally allow your borrower to cease
payment?
I also question how long the effect of a jubilee-premium would last. Five years? Ten? Brazil, Argentina and Mexico all defaulted on their sovereign debt in the 80s-- (https://en.wikipedia.org/wiki/Latin_American_debt_crisis ) and they certainly weren't locked out of the bond market forever-- Mexico's 30 year bonds are standing at about 6.8% right now. Gold was illegal to own in the United States from 1933 to 1975, (https://en.wikipedia.org/wiki/Gold_Reserve_Act ) yet investors aren't acting like they're afraid of the government taking their gold again-- it's at $1,155 a troy ounce right now.
6.8% represents quite a bit of risk in this environment of historically low rates. How is Argentina doing?
I mean, I agree that people will eventually "forget", but that's always with the assumption that the "last time" was some unique set of circumstances.
It's amazing to me that people still believe that the best way to reap the benefits of capitalism is to seize or extort the capital from the capital owners. Of course, everyone thinks that those capital owners are some mysterious "other", and they'll be unscathed by the wealth grab. I wonder what people would think if they were told by the government that their savings and investments were being reset to zero so some students could get a free education? Probably wouldn't be so impressed...
This is a survey: http://mappingignorance.org/2013/03/20/experiments-in-fairne...
The seminal experiment is Kahneman around 1986. I fail at finding a good treatise on it. But here's this: https://en.wikipedia.org/wiki/Prospect_theory
And as applied directly to econ: http://www.econ.uzh.ch/dam/jcr:ffffffff-9758-127f-0000-00005...
The banks are simply our agents in this. Roughly, other "innovations" have made debt more dangerous over time. My paltry understanding is that one of the uses of inflation is to erode the value of debt.
We don't have meaningful inflation any more. And yes, I relaize how bizarre that sounds. But: http://www.interfluidity.com/v2/3212.html
Something terrible has happened to the tradeoff between the balance sheet and cash flow. A really crummy analogy is position v. velocity on quantum realms; as competitiveness has escalated, we get to where the trade between them is more severe. Also IMO, much as wages have stagnated, the value of capital goods has also.
So, your solution to "the banks" slack policies - which were actually caused by government meddling: Affordable Housing Act, guaranteed student loans, etc...
Your solution is more government meddling? Forcing the banks that didn't want to give out loans... to lose money on those loans?
How about stay-out-of-the-way economics?
Socialism - take from the "rich" and give to the "poor" - disincentivizes people from working and being productive. Why work hard, when the trash down the street lives better by being worthless?
I mean... it just blows my mind that people see these issues... issues caused largely by interference... and so many think that the answer is more interference.
Most of the economic world is in agreement that financial deregulation was a huge contributing factor in the crash of 2007-08. The repeal of Glass-Steagall allowed banks to take on too much risk with too little supervision.
This would have been fine if the banks had been the only ones punished when their bets went bad - but they had also been allowed to accrue so much power (through consolidation/M&A) that it was impossible to let them face the consequences of their own bad decisions and fail. So they had to be underwriten with public money in the form of QE.
A functional society requires healthy levels of both capitalism and socialism to survive. But the most important thing in my opinion, is that those who intentionally commit fraud or do not act in the fiduciary interest of their stakeholders are adequately punished. This last part is of course the rub - how can you tell if the leaders of business and finance were intentionally setting up their dependents for a crash? What is the adequate punishment?
You don't get to take advantage of structural discrimination and then whine about how hard it is to have to treat people fairly. If that's a problem for a bank then they should find another asset class to invest in.
What you're saying is that we should _just take money from people_, without expectations to give them back anything directly.
Many retirees hold government bonds, which aren't going to default.
A consumer-debt jubilee mostly affects investors, and maybe pension funds.
So? Do you think that this sort of insurance is free, and can be called upon without economic consequence?
Where do you think this insurance comes from?
tl;dr is China will need to eventually give in and do debt forgiveness. there's strong historical precedent for it.
On the other hand, if the fed will pay me to borrow money, I'd love to borrow as much as I can and loan it out on Prosper or Kiva etc.
Alas, the banks get these primo rates, not average joes... who are still paying %15 on credit cards. (money the bank borrows at near zero) Risk compensation and profit do not account for probably even half of that spread.
http://www.nakedcapitalism.com/2016/02/new-york-times-bank-b...
Perhaps it makes sense switching to a "quantum-like" dynamics where one may "borrow" energy for a short amount of time before having to repay it, as in Heisenberg delta E * delta t uncertainty. So decreasing interest rates amounts to messing with some kind of Planck's constant.
I was just exploring an analogy, not particularly looking for any explanatory power.
It's clearly not a question of borrowing resources. It's conning people into thinking they have more resources than they actually have, while redistributing money around the economy. Until, the music stops and people notice they don't actually have anywhere to sit.
PS: It's sad how closely you can model the financial system as a pyramid scheme.
For literally decades people have suggested that China's economy (GDP) wasn't growing, it's money supply was. And as a result there would be a time when even with relaxed credit you could not justify adding any additional debt. At which point that particular path would be cut off and a more accurate picture of the economy would emerge. Which seems to be happening now.
What would be useful, but no doubt hard to get, would be a list of Chinese firms which are currently technically in default on their loans and so at risk of dissolution. And even more useful would be an understanding of how the Chinese government would treat them (would they bail them out like our government did for GM, or let them fail like Lehman Brothers?)
This idea of basically seeing into the future, pricing risk/rewards was what always drew me to study finance. Sounds cool on paper, but the reality is much messier and morally ambiguous.
buy gold.
buy bitcoin? :-)
Is he really that bad? Or do you just disagree with him?