Sunday, July 13, 2014

Ending the Great Stagnation: Some Practical Issues

I don't know if it's just happenstance or just me but the flavor du jour of a lot of my reading lately has been how we've just got to do something to dig ourselves out from under this debt mountain.   Public, maybe, okay, maybe not, but certainly private--the great ice cornice of mortgage debt that still hangs over our head from the aughts, and the.  Also maybe the fiery implacable demon of student loan debt whose menace is, I suspect, still only beginning to sink in on us.

Yes, well, right, sure.  But as to mortgage debt in particular--just exactly how would you do it?  As a matter of simple politics, we've  observed from the beginning  that there's large  and well-disciplined        view that any effort to assist these deadbeats  borrowers would be about as unpopular as it was to      succor the cigar-chomping gluttons perched atop the mountains of gold merde in the vaults of  Wall Street.

Yes well again.  But suppose we overrode the moral objections and soothed the instrumental fears, just exactly should we do?   Leave debtors in  possession of their homes with lower liabilities?    Write down a whole bunch of principal?  Have a jubilee?

I know the standard way to stick it to the man in creditor's rights is inflation: pay off the expensive debts with inflated confetti money.  Even if that were a good idea, it doesn't seem to be in the offing, so set it aside. I gather also that in the 30s, the Feds did engage in a kind of mortgage relief program where they bought up debt on the cheap, then refinanced with the magic of triple tax free, leaving the debtors in possession under a more tolerable burden (do I have this right?).   I know (this time I'm more sure) that the Supreme Court invalidated a farm bankruptcy law, only to to pirouette around and endorse an almost-indistinguishable statute a couple of years later. Good stories both, but do they matter to us now?

Oh, and there's that little matter of who takes the fall here--who owns those bond we want to write down?  I haven't seen or constructed a comprehensive flow of funds statement here, but I'm thinking of all those pension funds, grotesquely underfunded, scrambling for yield to meet their magical-thinking projections, happy to price as "safe" any borrower with a pulse. The pensions funds. Oh. Right. That would be me.


Charlena Leonard said...

That's a fairly compelling way of putting it. It is difficult to pay off a mortgage and a student debt at the same time, especially since employment has been on a low as of late. Ultimately, both debtors and creditors have rights, and both deserve a time to state their positions and defend their case in the legal sense. The point of such is to arrive at a conclusion that benefits both parties in such a way that the monetary stress is relieved somewhat. Always a pleasure to hear things from all sides and angles.

Charlena Leonard @ Weidner Law

Dan Mulligan said...

It is entirely possible to reduce principal, leaving the borrower in a position to pay and still not take a hit on the bonds. A paying lower value bond can be worth more than a nonpaying higher value one. Or get creative -- reduce principal and split the equity increase, if any, after a few years. Or, say, gee, many of those bonds are held by Fannie/Freddie and now the Fed. Just order them to do it.
Or, take the bankruptcy option and put it back on the table.
There have always been better solutions -- for borrowers, their communities, the nation AND investors, but no one wanted to take them because freedom and creeping socialism or, my theory, none of our overlords including Mr. Geithner and Mr. Obama actually knew anyone that was losing their home.