Debt forgiveness, one more time.

This Irish Times article reports Morgan Kelly’s keynote ISNE lecture where he discussed debt forgiveness and, in particular, mortgage debt relief. From the piece:

“We are talking sums in the region of €5 billion to €6 billion which would be necessary to spend on mortgage forgiveness, which by our standards are not very large,” he said.

“This sum to sort out tens of thousands of people with big problems does not seem enormous.”

Seamus Coffey has some thoughts on Prof Kelly’s argument here.

Readers should know I’m in favour of debt forgiveness for households, and have been for some time. It may be worth discussing the pros and cons of such a policy again.

Update: Jagdip has some thoughts on this debate on NamaWineLake.

Author: Stephen Kinsella

Senior Lecturer in Economics at the University of Limerick.

18 thoughts on “Debt forgiveness, one more time.”

  1. You mean cutting people’s wages and not forgiving debt might not be a sound economic policy? I’m shocked.

  2. @Stephen,

    “In our country there is problem” as Borat would sing.

    You are on the record with professional colleagues on your position on debt forgiveness in your article in the Irish Times last November which was discussed on here

    http://www.irisheconomy.ie/index.php/2010/11/11/economists-propose-mortgage-debt-relief/

    We are nine months on, and the only innovation has been a code for dealing with arrears which many say is kicking the can way down the road. Any effort to confront “the problem” is laudable, and you’re to be congratulated for making the effort to deal with what is plainly a big “problem”.

    But you and indeed Morgan are suggesting all sorts of innovations which might just distract and confuse the argument. How many comments on Morgan’s contribution in this thread will refer to recklessness, profligacy, moral hazard and “I didn’t buy during the madness”?

    We really need to press for basic debt reforms in this country. We have 9 bankruptcies per annum in the Republic. For the first six months of 2011, the North has had 902. And it has had 500+ IVAs (bankruptcy lite) in addition. If we can get the basic template of an international scheme in place then the details can be refined.

    But for now, all these contributions on debt forgiveness are just miring down the debate on a basic debt resolution scheme.

  3. @Jagdiip, just left this comment on your blog, reposting it here.

    I agree with you on the lack of specifics in this debate. I also agree that dangling solutions is cruel when no implementation is possible ‘in the current climate’. I think it behooves us to think beyond the possible sometimes to start a debate. But that is at the level of national rhetoric and discourse, and not really connecting with what’s happening on the ground.

    As part of newbeginnings I speak to those having their homes taken from them quite a bit. I spoke to a lady today going through a repossession and eviction. It is not easy when you hear these stories. The truth is that they don’t care what economists say in lectures to graduate students. The process for them is all that matters. And the process is unfair and outmoded, as you say.

  4. http://www.herald.ie/news/euro6bn-bailout-will-solve-our-homes-crisis-says-kelly-2853064.html

    A good suggestion there from Morgan Kelly to bring relief to homeowners on the end of a mortgage facing 50% plus negative equity, rising interest rates, charges, taxes, loss of earnings, maybe unemployment in the great go slow our economy is experiencing.

    Morgan was attacked last week by Ronald Quinlan Sunday Indo Aug 14 on his figures.

    Quinlan: “…2005 and 2006…In those two years, a total of 7,435 properties with values of €635,000 were sold. And while that number is also substantial, it does not tally with Prof Kelly’s estimate of 10,000 mortgages on properties valued between €1m and €2m.”

    Quinlan: “Professor Kelly shocked his audience at the Kilkenny Arts Festival last weekend with predictions of additional banking losses of several billion euro, which he said would come from 10,000 mortgages given out “at the peak of the bubble” to “lawyers, solicitors and estate agents” to purchase properties of €1m to €2m.

    Quinlan ridiculously goes and researches the number of
    professionals practicing in the above professions and finds out the figure doesn’t come to 10,000 and on he goes with cock eyed propaganda attacking Kelly typical of rubbish journalism.

    Its embarrassing here to have to defend the fact that MK was 100% probably using the list not in a definitive sense but in an illustrative sense. Obviously professionals outside that short list bought property….maybe even university lecturers or even populist economists:)

    Then there is the figure difference between €635,000 and €1 – €2m. Lets apply a bit of logic here. Lets assume above €635,000 80% were in the range €1 – €2m while 10% were beneath and 10% above that range. There is no significant difference between what MK and Quinlan are saying.

    Then there’s the figure of 7,435, a figure Quinlan apparently has garnered from Revenue statistics, approx 75% of MK’s 10,000 figure. Quinlan is not familiar with the ruse widespread at the time of remortgaging your house to use the proceeds to purchase another property. Nor is Quinlan familiar with the widespread practice of investment in property abroad using similar devices. Again there is substantial agreement between MK and Quinlan, approx 25% of disagreement.

    I take MK’s figures against Quinlan’s blinkered one’s anyday!

    But here, folks, is the nub of the matter. Both Quinlan and MK are hobbled by the secrecy of the banks. surely now that we now own them, we can get the data and the precise stats to put them on the table to settle all arguments!

    We’ve had nothing but lies from the banks!

    We need to follow MK’s brave stand against the banks and expose the rot from the financial sector that has taken over politics; and infected journalism with plain and ignorant propaganda seeking to pull the wool over all our Titanic eyes.

    Good that MK has made those points. Issues abound eg the punter who couldn’t afford to pay for a house now bailing out with his taxes the guy who possible carelessly went in over his head, but the whole problem of wasting relief supporting the banks, rather than taxpayers who lost their homes, is well made.

  5. The explicit call to rescue the middle class from the mortgages they took out on their McMansions – apparently the working class must sadly do without such largesse – is offensive to me as a citizen of this state.

  6. Ok – but we have a declining money supply yes ?
    If you forgive mortgages in a static or declining money envoirment other people must pay.
    That fact that money is not being spent on capital infrastructure means that the wealth of the country is declining through depreciation.
    This is worse then a zero sum game – it is a negative sum game.
    Why is not the money supply not rising to lets say reduce the energy intensity of this country ?
    When I employ people to rebuild lets say the railway line to Youghal money is spent into the country to pay down private debt and also the countries wealth increases.
    This is just another deliberately narrow autistic piece – completly alien to more enlightened economic discourse.

  7. Stephen has linked to a post of mine above, but that is in relation to the phantom 10,000 mortgages of €1mln+ that we were introduced to in Kilkenny. I’m pretty sure that they these mortgages do not exist but feel that the discussion about them has generated more heat than light.

    This post on household loans might be more appropriate here.

    According to the Central Bank’s Quarterly Financial Accounts, long-term loans to households peaked at €190 billion in the final quarter of 2008. By the first quarter of 2011 this had dropped to €176 billion.

    This drop is due to very low levels of new debt creation (particularly mortgages) and repayments on existing debt. Some may be due to write-downs but at this stage it remains low.

    Irish households are saving about €3 billion a quarter and most of this is going to pay down debt.

    In the aggregate, the household sector balance sheet is improving. There are individual cases where the situation is beyond redemption and it is here than any ‘solution’ has to be targetted. I am not in favour of a general mortgage debt forgiveness scheme but would like to see something done in does cases where the loan is clearly unsustainable.

  8. I’m for reform of bankruptcy laws. 3 years sounds reasonable.

    It seems to me the tax payer is already involved, NAMAs existance is probably keeping rents and prices higher than they should be, the social welfare is subsidizing 20% of the rental market and probably creating an artifical floor for it via rent allowance, interest relief got expanded for those that bought in the ‘boom’ and the bailed out banks are loosing a billion a year to tracker mortgage holders (generally given out during ‘the boom).

    Moral Hazard of course can be argued but when you consider the Financial services sector hasn’t exactly suffered, instead of contribtung to science, working for the greater good or doing something useful for society, these guys have spent their careers essentially working out ways to destroy it with Xcel spreadsheets. If there was any justice most would be in jail, instead of getting rewarded with vulger bonuses via Tax payer bailouts. Yeah when you compare it to bailing out these guys it seems quant to argue moral hazard for bailing out some poor sod who believed Berite Aherns ‘Boom times are getting Boomier’ rant.

    Having said that my hope is that, as a country we eventually shake off the ‘be a professional’ and own a house and rent out a few apartments idea of wealth and/or success. I’m rooting for set up a business, fail, set -up another fail again, set-up another make a million and employ a few people. Eventually leading to a – hold on to the business and give the country a Nokia.

    How about those in distress apply for bankruptcy, it takes say 3 years but immediately they get a mortgage ‘exception’ for bidding on only their own property when it goes to auction. They’re not allowed to attend the auction, the auctions have to be run by a company that does it well eg Allsops, their max bid being what any lender would allow them based solely on (hopefully a sensible multiple of) thieir salarie(s).

    There’s plenty of ideas, the above could be rubbish, it’s more of a think out loud. Either way lets get this property mess behind us. And for the love of God, make sure the politicans aren’t involved anywhere. Can you imagine the nonsense/clientism and the following enquiry.

  9. There is almost no money available for capital investments but billions available for debt forgiveness?

  10. dork…As always excellent post…

    The dirty secret at the heart of it all is that, if you forgive debt in a falling money supply environment then the pace of money supply declines accelerates,so do everything possible to hold onto the fiction that the banks assets are good, then wrap that in a moral hazard argument so any intelligent discussion about it is almost impossible.

    The more I follow the shenanigans in Europe, the ore aim convinced that the politics around this crisis is about the next one, because the solutions for this one are a) obvious and inevitable and b) already in place. Essentially the ECB is supporting the Europe wide banking system through the EU bank clearing mechanism and when most of that is done, the ECB has to monetize.

    So if we are to prepare for the next crisis, we have to make sure that the insiders can never do this again. They can never be allowed to hijack the system on the way up and, but pulling their special access to dumb politicians, then pass the wreckage over to the public sector. IThat is moral hazard and it will lead to even worse disaster if these people are allowed to recharge their mark. It’s easy to fix BTW, ban limited liability lending institutions and put owners and managers at the front of the line totals oases and if they can’t cover the losses then all of their asset are forfeit, and they go to jail.

  11. @Bkyln rntr
    Thanks Bkyln but I think I am in the head banging phase of discourse now.
    But most of these politicians , economists and even junior bankers have lived through a dollar reserve / oil bubble – in fact its nearly a 100 year phenomenon.
    The very metrics they use for progress has been flawed for such a long time now – and these flawed metrics has corrupted the body politic to extreme levels.
    I am a fan of 100% deposit institutions with only goverment providing the new credit in a simple transparent clear manner but this is not likely to happen.
    The senior bankers in continental Europe wish to clear the debt via a freegold mechanism in my opinion.

  12. What’s freegold?

    Couldnt agree more on what the bankers are up to and economists have, in general disappeared up their own wotsits. As far as I can make out current economic orthodoxy is a toxic mix of keynsianism (government can step in to smooth cycles) and Milton Friedman to create an intellectual monster in which government is ALWAYS responsible for losses but the private Sector insiders are ALWAYS entitled to profits and it all works on a combination of fractional reserve banking (fine in itself) combined with limited liability financial institutions (again fine in itself). The combination is akin to mixing bleach with ammonia.

  13. Its whats happening on the ECBs balance sheet right now.
    The Euro was all about destroying the dollar reserve currency which quite rightly is unsustainable – but if the Euro is successful it will enrich Gold holders enormously as the worlds savings in such things as eurodollars (really dollars held outside the states that no longer is necessarily in Europe anymore) shift into the ECBs and other non dollar / large gold reserve CBs balance sheets and private holders.

    Monday, August 6, 2001 – GOLD @ $267.20 – FOA: “The result will be a massive dollar price rise in gold that performs over several years, as the reserve function transition politically begins.”
    Tuesday, January 1, 2002 – Launch of euro notes and coins
    Friday, February 8, 2002 – GOLD ABOVE $300
    Monday, December 1, 2003 – GOLD ABOVE $400
    Thursday December 1, 2005 – GOLD ABOVE $500
    Monday, April 17, 2006 – GOLD ABOVE $600
    Tuesday, May 9, 2006 – GOLD ABOVE $700
    Friday, November 2, 2007 – GOLD ABOVE $800
    Monday, January 14, 2008 – GOLD ABOVE $900
    Monday, March 17, 2008 – GOLD ABOVE $1000
    Monday, November 9, 2009 – GOLD ABOVE $1100
    Tuesday, December 1, 2009 – GOLD ABOVE $1200
    Tuesday, September 28, 2010 – GOLD ABOVE $1300
    Wednesday, November 9, 2010 – GOLD ABOVE $1400
    Wednesday, April 20, 2011 – GOLD ABOVE $1500
    Monday, July 18, 2011 – GOLD ABOVE $1600
    Monday, August 8, 2011 – GOLD ABOVE $1700
    Thursday, August 18, 2011 – GOLD ABOVE $1800

    here’s a two year old article – it explains the dollar reserve problem pretty well in my opinion.
    fofoa.blogspot.com/2010/02/greece-is-word.html

    Apart from the fact the commentator is a Phil Collins fan he is spot on – although this song captures the greed of Gold holders wonderfully.
    http://www.youtube.com/watch?v=manxPVTLth8
    People are not prepared for this monetory transition – its the complete opposite of the dollars rise post Great war.
    But please remember this is NOT THE GOLD STANDARD.

    My precious , my precious my precious……………

  14. The Banque de France has always been very Gold friendly.

    What happened when rumours of Soc Gen was in trouble ?

    They hit the red button me thinks – but just a flick and then off again………..
    THE NUCLEAR OPTION

    “The ECB and the BIS have a secret weapon. They don’t want to have to use it because they don’t want to be seen as the instigators of the dollar’s collapse. They would prefer the market to take care of it for them. But don’t doubt for a second that they won’t use it before sitting back and watching permanent damage come to the euro system.”

    COMEX being in the US and the LBMA being in London leaves the ECB and the BIS with “the nuclear option” if things ever get desperate enough to use it. This nuclear option is A) for the BIS to begin operation of a public “physical only” market for gold to be used by the really giant participants, primarily sovereign entities and billionaires, and B) for the ECB to use the price discovered by the BIS in its quarterly reserve asset “marked to market” adjustments.

    “Such a move would put Greece, and all the PIIGS for that matter(EXCEPT IRELAND UNLESS PRIVATE DONARS GIVE TO THE CENTRAL BANK AND BUY IRISH DEBT – My words ), in a much better position almost overnight. Of course it would have devastating effects on the value of the dollar and the rest of the paper gold market. You see, in order for the BIS to supply actual physical gold to each and every giant that was ready to buy, the price would have to rise high enough that someone else with an equally huge amount of gold was willing to become a seller. And right now, at today’s prices, we know that the central banks of the world have become net buyers! So the question is, just how high would the price have to rise in order to balance out the demand of the world with the supply, in a physical-only official price discovery market?”

  15. Well I don’t know it that theory holds…..the US is the largest holder of gold by a mile and they haven’t sold any…..the French, you mention have a penchant for gold, but their reserves are tiny compared to those of the uS and GB has none or almost none after Brown sold out….

    I agree there’s a currency war and I suspect you are right that the US is worried that the Euro could become a reserve currency…the problem is a reserve currency necessitates trade engagement coupled with a currenst account deficit (otherwise there is a dwindling amount of reserve currency in the non reserve system). Europe doesn’t have those relationships today and the Europeans are frankly despised by the Asians.

    If gold were to be the next reserve currency and if governments understand that, then they can always allow gold to appreciate massively before they move to that currency. So if the world’s monetary aggregates today amount to something like 80 to 100 trillion USD, then the value of god reserves has to amount to something like 8 trillion to 10 trillion assuming a 10x leverage in the system , today those reserves are worth about 1.3 trillion ( I think).

  16. @Bklyn
    It would not matter how much Gold America has as it is in a dramatic trade defecit and Europe much less so.

    The US treasuary only owns that gold because it refused to play ball in 71 and defaulted on its obligations.
    Also CBs have official gold reserves and unofficial which is all private gold recorded in a juristiction – its my belief that Europe has drained much of Americas private gold during the last decade or so – the recent rise in euro interest rates relative to the US suggests Trichet wants that phenomena to continue.
    FOFOA suggests the new Gold price could rise to $55,000 a ounce based on all monetory aggregates so your 10x times calculation may be a bit off – but to be honest I would take the cash when it reaches M1.

    The euro free gold arrangement does not mean the Euro will be a reserve currency like the dollar once was when under the external gold standard or free floating reserve – the price will reach some sort of equilibrium and debt will trade relative to physical gold – at least that is the plan , the US treasuary is not giving up yet though I think – although its best tactically for Ireland to join the Anglo world again – the various personalities that sometimes appear as genuinely euro sceptic may have a different agenda then just concern for little old Hibernia

  17. Gold is (has been) good. High probability it has maxed-out in this phase. May take a bad tumble shortly.

    Forget the reserve currency nonsense; this idea went out years ago. USD was backed by massive productive capacity of US. That’s history. So … …? What’s next? China?? Possibly, but who will buy the produce of 300 million robots – maybe Chinese are intent on giving it all away for free to Africa – in exchange for land to grow food. Interesting times ahead.

    The financials have pushed themselves into a very nasty cul-de-sac. No room to expand and no reverse gear available. Too much money was created – like water piling up behind a dam. Dam can only hold so much. Its time to head for the high ground ‘fore dam overflows – or worse, collapses.

    Brian Snr.

  18. Brian,
    I don’t know that gold will never again be a reserve currency…there is too much history associated with it and EVERY experiment with paper money ends up the same way…they at some point print too much and when they do, it exposes the corruption/asymmetries of access endemic in a fiat currency system.

    I get your point about robots, that region has not proved itself capable of real innovation for nigh on a thousand years, but they do have an enormous population, and they are fiendishly productive. Their technology is backward but their capacity to backward engineer some of the world’s most advanced technologies and their minimal consumption requirements makes it likely that they will be net acquirers of wealth for some time to come and at the expense of the west.

    The choice are NOT USD or Euros, the choice are Chinese Renmimbi or Gold. If the Chinese take reserve status, I wonder how the west will look?

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