I agree with Brett Arends’ solution 1,000%. This is the ONLY way to fix our economy. The banks need to be liquidated and the bad debt purged from the system. The short term pain would be intense, but the economy would begin to recover within a year. I’m glad to see some mainstream financial analysts get it. The “solutions” offered by Federal Reserve bankers and captured politicians are nothing but an attempt to maintain their wealth, power and prestige. They don’t care about the average American. They disdain average Americans. They hobnob with the other powerful elites and are revolted by the peasants. It is time to bring these banks down before they destroy us all.
Massive default is best way to fix the economy
Commentary: Clearing away the debt is the only way forward
By Brett Arends, MarketWatch
NEW YORK (MarketWatch) — You want to fix this economic crisis? You want to put people back to work? You want to light a fire under the economy?
There’s a way to do it. Fast. And relatively simple.
But you’re not going to like it. You’re not going to like it at all.
Default. A national Chapter 11 bankruptcy.
The fastest way to fix this mess is to see tens of millions of homeowners default on their mortgages and other debts, and millions more file for bankruptcy.
Fears of recession, tough trading conditions, an ocean of unresolved litigation and the worsening euro-zone mess have delivered a real pounding to bank stocks this summer. Former Goldman Sachs partner Roy Smith joins Mean Street to offer a solution: Break up the banks.
I told you that you wouldn’t like it.
I don’t like it much either. It sticks in the craw that people got to borrow all that money and won’t have to pay it back.
But you know what? The time to stop that was five or 10 years ago, when the money was being lent.
It’s gone.
And mass Chapter 11 is, by far, the least obnoxious solution to our problems.
That’s because the real cause of our economic slump isn’t too much government or too little government. It isn’t red tape, high taxes, low taxes, the growing divide between the rich and the poor, too much government debt, too little government debt, corporations, poor people, “greed,” “socialism,” China, Greece, or the legalization of gay marriage. It isn’t, in short, any of the things all the various nitwits say it is.
We’re hocked up to the eyeballs, and then some. We’re at the bottom of a lake of debt, lashed to an anchor. American households today owe $13.3 trillion. That has quadrupled in a generation. It has doubled just in the last 11 years. We owe more than any other nation, ever. And for all the yakking about how people are “repairing their balance sheets,” they’re not. From the peak, four years ago, they’ve cut their debts by a grand total of 4%.
And a lot of that was in write-offs.
More than a quarter of American mortgages are underwater. Many are deeply underwater. In states like Nevada and Florida the figures are astronomical.
The key thing to understand is that most of that money has gone to what a fund manager friend of mine calls “money heaven.” Most of these debts will never, ever be repaid in real money. Not gonna happen.
Think how corporations handle this kind of situation.
It happens all the time. Banks and bondholders find they have lent, say, $1 billion to a company whose assets and earning capacity will only repay, say, $300 million. What happens? Does the company soldier on with $1 billion in debt it can never repay? Do the stockholders send back their dividend checks? Do they sell their homes to pay off the bonds?
Not a chance. The company goes through Chapter 11. The creditors ‘fess up to their blunder, they face up to their losses, and they fix it. They write down the loans and take the equity instead. The balance sheet is cleaned up, and the company starts again.
Why not homeowners?
Most of the objections to this idea are well-meant, but misinformed.
A fund manager I asked raised the issue of “moral hazard.” Why should anyone pay their mortgage if some people were getting a pass, he asked?
The answer: For the same reason GE and Verizon kept paying the coupon on their bonds while Lehman Brothers defaulted. You want to keep your credit standing. And you want to keep your equity.
If a company defaults, the stockholders get wiped out. If a homeowner defaults, the bank takes the home. I like keeping my home, as well as my savings, and my credit rating. Most people are the same.
Some will say the financial impact would be terrible. But the banks would just be facing up to reality. And a lot of these mortgages are already trading at distressed levels.
Some will say, “why should people get away with borrowing imprudently?” The response: Why should the banks get away with lending imprudently?
There’s no point telling people not to borrow money. They always will. I have yet to see a Wall Street executive turn down free money. I have yet to see a company in an IPO say, “Don’t give us so much money!” People like money. They will take as much as they are offered.
In a free economy, the people who are supposed to ration the loans are the lenders. Banks are supposed to lend carefully and responsibly. What else are they paid for? Accepting deposits? You could hire people on minimum wage to do that.
Some will say, “it’s immoral” for borrowers to default. Alas, most of these people are being inconsistent. They are usually the first ones to defend a company when it closes down a factory and ships the jobs to China, or pays the CEO $50 million for doing a bad job, on the grounds that “this ain’t morality, pal, this is business!”
But when Main Street wants to do the same thing, they start screaming “Morality! Morality!”
We don’t live in an economy based on morals and fairness.
T Mobile doesn’t charge me what’s “fair” each month. They charge me what’s on the contract. Your employer doesn’t pay you more if you need more. He pays you your economic value. Did Dick Grasso give back his bonus? Bob Nardelli? Dick Fuld? We operate in an economy based very firmly on contracts, and nothing else. Companies, and the wealthy, live by the letter of the law.
American mortgage contracts allow for default. Half of the states in this country are “non-recourse,” which broadly speaking means you can send in the keys and walk away from a bad loan. The other half are sort of “semi-recourse.” The bank can come after you for any shortfall, but only in a limited way. Broadly speaking they can’t touch retirement accounts and basic assets. You can typically keep your car, personal effects, often things like life insurance.
Most of the people who are deeply underwater don’t have that much anyway.
And the banks knew this. When they were lending $500,000 to a bus driver with $1,000 in his checking account, they knew that their loan was only guaranteed by the value of the home.
If they didn’t know it, they should have. Their incompetence is not our problem.
It’s tempting to say, “if someone borrows money, they should repay it.” Generally speaking, I agree. I pay all my debts. But while that makes sense when applied to any individual, it doesn’t work so well when it’s applied to everyone.
We have tens of millions who cannot repay their debts. But they are all trying to. That sucks huge amounts of money out of the economy. And that means these people cannot function properly as consumers or workers. That’s the reason people aren’t coming into your restaurant. It’s the reason people aren’t taking your yoga class. It’s the reason they haven’t hired you to redo the kitchen.
And so tens or hundreds of millions of perfectly responsible business owners and employees are also suffering from this slump. That’s the reason we have a shortage of demand. That’s the reason no one is hiring.
Even worse: People who are underwater on their mortgage, but who do not want to default, cannot move to where the jobs are either. They are stuck with their home.
You want to break this logjam? Try Chapter 11 for the nation. Massive defaults. Clear the decks, clean the books.
What are the alternatives?
Government cutbacks, higher taxes, and a balanced budget? In a normal economy, fine. But in this situation, when the private sector is also slashing its spending, that could lead to absolute catastrophe. That’s what happened in the Great Depression. And our debt levels are worse than in the Great Depression.
Government borrowing? That’s the Keynesian solution. “The consumer can no longer borrow like a crazy person,” says the Keynesian, “so Uncle Sam has to do so instead.” It’s just transferring private madness to public madness.
Inflation? That’s probably the least bad alternative. But it’s just default by another name. And instead of taking money from the imprudent banks that caused the problem, it robs grandma’s savings.
Twice before, advanced economies have gone through what we are going through now — namely a massive hangover after a massive debt binge.
The first was the U.S. in the 1930s, the second was Japan in the 1990s.
The U.S. didn’t get out of it until the 1940s unleashed inflation and reduced the debt’s value in real terms.
Japan still hasn’t gotten out of it. They have deflation, while government debt has skyrocketed.
The correct moral hazard is to punish the banks who lent imprudently by making them eat their own losses.
I told you that you wouldn’t like it. I don’t either. But the alternatives are worse.
Centerfield says:
We don’t have a police force/military complex large enough to manage through a BK scenario. Too drastic a step…too Draconian. People would take up arms before they bowed to it. That scenario would create world-wide anarchy. That is not what we want, correct? Or are you saying it’s simply unavoidable anyway so bring it on?
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12th September 2011 at 12:26 pm
Administrator says:
Centerfield
The bankers and the Wall Street elite would take the brunt of the pain. The average person is already suffering. The longer we kick the can down the road, the worse it will be. Bring it on.
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12th September 2011 at 12:28 pm
Yojimbo says:
The only question you have to ask in dealing with the fucking bankers is: What would Steve McQueen do?
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12th September 2011 at 12:56 pm
VinnieTheShark says:
The longer this goes on and the more money we print, I wonder how it will impact the little hometown banks on Main Street. Making the TBTF banks eat their bad decisions now will still allow those of us helping Main Street to continue to do business. Inflating it out leading to more folks who cannot pay rent, fuel, food, etc. defaulting on a massive scale will break almost ALL banks, IMHO.
The domino effect of these decisions are truly far reaching. The storm clouds are continuing to build. It is starting to pour in Greece, sprinkling in the rest of Europe, and is headed our way where I fear hurricane conditions will be felt across all the US. Batten down the hatches, its gonna get real. When the storm passes, there will be opportunities like no others we’ve seen.
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12th September 2011 at 1:52 pm
Dave Doe says:
If Wall Street and Washington have to choose between saving themselves but destorying everyone else and saving everyone else but destroying themselves, what do you think they’re going to do.
They will try to print their way out until the currency collpases. They will nibble around the edges. There is already talk of trying to refi more mortgages. But, they’ll never go fo this because it will destory them (Banks and current Political Class).
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12th September 2011 at 2:05 pm
Kill Bill says:
Flip The Board
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12th September 2011 at 2:05 pm
Kill Bill says:
article in The Atlantic:
“Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.
How does the housing bubble debt compare? If you add together mortgages and revolving home equity, then from the first quarter of 1999 to when housing-related debt peaked in the third quarter of 2008, the sum increased from $3.28 trillion to $9.98 trillion. Over this period, housing-related debt had increased threefold. Meanwhile, over the entire period shown on the chart, the balance of student loans grew by more than 6x. The growth of student loans has been twice as steep — and it’s showing no signs of slowing.
~~~~
Heap Big Catastrophe Lurks Ahead
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12th September 2011 at 2:12 pm
Dave Doe says:
Only difference is that student debt cannot be discharged in a personal bankruptcy. Look for that to change.
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12th September 2011 at 2:39 pm
Centerfield says:
I should take every last dollar that I have and open a gun store specializing in cheap Saturday Night Specials. Hoard them at $50-75/ea wholesale and then sell them for $500 ea when the SHTF. Same for the ammo. If currency is no longer valid, then I would eat like a king for the trade value alone. The Arms Dealers of the world will become the new elite….just watch. I will also have to prepare to die, as someone that I trust will eventually pop a cap into the back of my head because of the greed factor.
I’m fucked either way. LOL
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12th September 2011 at 2:52 pm
VinnieTheShark says:
Centerfield,
Reminds me of the Lord of War movie with the rat race over Russia’s arms after the breakup of the USSR. Could happen here, I suppose. What a scary thought. I wonder what a B-2 Bomber would bring? I sat in the cockpit of one last month on a visit to Whiteman AFB. What a bird. Until gold hit $1,718.75/oz, they were worth more than their weight in gold.
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12th September 2011 at 3:43 pm
Centerfield says:
B-2′s are too bulky. You have to think portable…Stingers, Hellfires, hand grenades, Claymores, etc. I think this business model has some potential (and tax free to boot!).
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12th September 2011 at 3:49 pm
AWD says:
KB:
That number for student loan debt is way too low. It’s much closer to $1 trillion.
I vote we liquidate the student loan debt first. Then the banks.
What are we going to do about the greed? you can’t liquidate that.
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12th September 2011 at 4:05 pm
Centerfield says:
AWD, you can’t liquidate the greed. But you can retrain it…with some good rope and a tall oak tree.
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12th September 2011 at 4:07 pm
AWD says:
Obama is saving his grand plan until next September, but parts have been leaked:
1. All debt will be treated to the -1 coefficient. Meaning, multiply your debt by -1. Since debt is a negative number, multiplying by -1 will give you a positive number. Your $200,000 in student loan debt will become a $200,000 asset. Your reward for all the hard work of educating yourself and bettering our country. Our $15 trillion deficit will then become a $15 trillion surplus. Everyone then gets tons, piles, and heaps of free shit before the election, courtesy of Emperor Obama.
2. The above action will, of course, require changing the currency. Dollars will be converted into Obamabucks. The conversion rate has not been released yet, but you simply trade your dollars for Obamabucks at any bank. Treasury bills and other forms of debt will be wiped away, clean.
3. All companies will be nationalized, for their own good, once their assets are worth nothing (after all, they were valued in a now non-circulating currency). Obama already has a lengthy list of CEOs he will appoint to every company and corporation. Most currently reside on the South Side of Chicago.
Poof, it’s all fixed. Doesn’t Obama look like a genius? Just in time for the election…
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12th September 2011 at 4:27 pm
Opinionated Bloviator says:
Liquidating out the bad debt, especially if it involves defaulting on our foreign debt, which it will has a sting in the tail that this article fails to acknowledge, the US dollar is no longer the worlds reserve currency.
The effects of that loss are harder to quantify but it would be all bad.
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12th September 2011 at 7:12 pm
Novista says:
OB
that’s a pretty small tail, seeing as how 2/3 of the national debt is held domestically.
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12th September 2011 at 8:33 am
Opinionated Bloviator says:
Novista – It’s not just the default, having the US dollar as a “reserve currency” is an enormous advantage to the United States, losing that would have a significant impact.
Having said that, I have no way of accurately quantifying what exactly that impact would be, so an opinion out of the arse it is.
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12th September 2011 at 9:07 am
Mary Malone says:
Great article. It’s time to acknowledge the pink elephant in the middle of the room and admit there is no other way out of this mess.
Many home-owners are working with debt relief agencies – that’s why the BK filings aren’t higher. It’s a valiant effort – and just not working.
Chapter 11 or 7 is the only solution.
Many home-owners are defending themselves against foreclosure in the BK courts. They are able to wipe out their unsecured debt and hold the “lender” to a higher standard in forcing them to show actual evidence they are the true creditor. Almost 100% of all lenders who are challenged by debtor in BK court -are winning huge principal reductions. Why? The “lenders” cannot meet the threshold in proof of claim.
A family can get out from under mountain of debt and save their home for about $2500.
Worth thinking about….
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12th September 2011 at 9:14 am
Apollo says:
When the USSR hit the skids beginning around 1988, that it will go under is a mathematical certainty. And so it did in 1989-1990. It proceeded to default on its sovereign debt. No amount of actions, and there were a huge amount of desperate actions, can prevent that. It was too late. Reason: Too much debt.
Today, that Greece will default of its debt is a mathematical certainty. The question is when, and how the nation will cope with sliding into 3rd world. No amount of actions can reverse this outcome. Reason: Too much debt. Too late.
So here we are in America. Same story – too much debt. But is it a mathematical certainty? No quite yet because there is a fudge factor in the equation. It is called world reserve currency – America debt happens to be other country’s savings. How it will play out has more to do with unpredictable foreigner psychology. Things can drag on for years, or thing can snap overnight.
But can America problems be fixed? Everything man-made can be fixed. There is only one fix: America must default to domestic creditors. In short, the banks, the funds managers, the billionaires – the holders of the vast amount of credit to the debt slaves – must take a dramatic haircut. Their wealth wiped out. Housing foreclosures is part of that default. But so so much more unplayable debt remains. Domestic default too is a mathematical certainty. Well, the Money Gods are the ones who started the debt culture. So they should take the fall – which they not so far. The question is who is going to make them take the fall, and how will they react. I call it revolution and breakup. That’s how nations have always wiped out their debt and start over.
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12th September 2011 at 2:19 pm