Debt forgiveness, one more time.

@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.

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.

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.

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.

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.

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.

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?”

@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

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?