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.
Do most 401Ks really invest in student debt?
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.
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?
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.
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?
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.
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.
Is he really that bad? Or do you just disagree with him?
