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Guest Post: Debtor’s Revolt?

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Submitted by Marshall Auerback, an investment manager who writes for New Deal 2.0.

In “The Holy Grail of Macroeconomics”, Richard C Koo’s account of post-bubble Japan, Koo illustrates that highly indebted corporations with depressed asset holdings and a positive cash flow will embark on sustained debt repayment until their balance sheets are healthy once again. He argues that this happened in Japan over the last 2 decades and in the U.S. over the four years of the Great Depression. This ongoing debt repayment created decades of economic stagnation, particularly because the fiscal response was so fitful and inconsistently applied.

But does it therefore follow that sustained debt repayment will be the response of a household sector in the U.S. with destroyed asset holdings and high debt? To our way of thinking, it is unclear. This is especially the case with respect to mortgage indebtedness; U. S. households have non-recourse mortgage loans and can walk away from their debts rather than pay them down.

Public opinion polls reveal that Americans are angry about the current economic, healthcare, housing and environmental crises. Polls also document that a significant majority of the population want federal government assistance to fix these problems. But you’ve also got the makings of a huge neo-populist anger brewing, largely because (in the words of Frank Rich), “What disturbs Americans of all ideological persuasions is the fear that almost everything, not just government, is fixed or manipulated by some powerful hidden hand, from commercial transactions as trivial as the sales of prime concert tickets to cultural forces as pervasive as the news media.” In other words, even the feds might not be able to help.

The approach to financial reform that the Obama Administration has hitherto adopted is a classic illustration of this problem. Financial institutions are now back to business as usual and have provided limited help to the non-financial sector. In fact, some of them are clearly committed to worsen households’ financial position and have oriented their activity toward this end in order to maximize their profitability. Yet, they have received commitments from the taxpayer totally $23.7 trillion.

On the other side, households and other non-financial institutions, whose dire finance is at the heart of the crisis, have received very limited help. Loan modifications programs and fiscal measures to raise their income and restore their creditworthiness have been too small to deal with the massive size of their financial problems, as we discussed in an earlier post.

All of which would suggest that it would not take that much to engender a situation where the country experienced a widespread debt revulsion. It might come to that, despite eminently more just historic alternatives, which Obama’s economic advisors could have drawn on, but chose not to.

Consider the case of German reunification in 1989. At the time, East Germany, like its West German counterpart, had banks with deposit liabilities and loans to firms. With unification Est marks and D-marks were converted at 1 to 1 so all those firms now owed DM and the households had DM deposits. The old East German banks would have been instantly bankrupt since their assets went to zero on a commercial “mark to market” basis. Had things been left there, it would have meant that the households lost all their deposits, not a good political or economic solution. So the answer was to merge the East and West German banks, but the West German banks were not about to take on all those deposits against the bad assets, so the newly unified German Government gave the banks special issue of government debt of an amount equal to the deposits to balance the books and give the bank some additional asset income.

How to fill the gap today? So far we have been letting the banks swap the assets at more or less full value for treasury securities from the Fed while we have done nothing for the households. Yet both have notional losses that we do not want to recognise until the household walks and then we have to. The alternative would be to have the govt absorb the difference, by issuing, say, 50 year bonds to the banks against the banks writing down the loans.

The reason we apparently do not adopt this alternative approach is because the banks have wanted to avoid price discovery on their “legacy assets” by all means possible. They do not want the world knowing how many toxic assets they really have on their books. They most certainly do not want to illuminate the scale of these losses (which might show them to be effectively insolvent), as this would expose the TARP recipients to receivership and restructuring via the FDIC, thereby breaking up their power once and for all.

Given current realities, an FDIC style reorganisation and restructuring will not happen, barring a secondary relapse in economic activity. Which might leave the American public to take matters into their own hands via outright debt repudiation. There is a reason why there was a historical tradition of debt jubilees every 50 years and usury laws.

Maybe inflation is the modern version of these two tools to manage the effects of the dead hand of the rentiers, albeit in a more incremental fashion, but outright debt repudiation is more likely today, given the absence of any kind of inflationary pressures.

In many respects, the Argentina example of 2001 is instructive. True, the economics are not completely analogous here because Argentina repudiated foreign debt to get out of an externally imposed debt deflation, whereas here we are discussing the crushing burden of domestic debt on the part of the US household sector. Still, in many ways, the ultimate effect is the same and Argentina’s repudiation could well have implications for the US, were American households to embrace a similar tactic.

After Argentina abandoned the dollar peg, the peso collapsed, leaving the country with a horribly burdensome deflationary foreign debt repayment program foisted on it by the IMF (yet again making the world safe for US investment banks at the expense of everybody else) as a condition for further economic assistance.

But then President Nelson Kirchner threatened to forego debt repayment to the country’s foreign creditors in the event that the IMF continued to insist on being repaid in a manner which didn’t deflate the country into the ground.

In effect, Kirchner called the bluff of the IMF and he won. Argentina repudiated its debts and immediately started to grow again, led by exports from a vastly depreciated peso. The IMF continued to insist that Argentina would remain cut off from the foreign debt markets whilst the country refused to repay its foreign debts. But the threat was exposed for the hollow one it was: the reality was that Argentina didn’t need to subject themselves to the poisoned chalice which the IMF was offering as a condition of obtaining yet more foreign credit. (As an aside, a government’s ability to spend and service its debt is only unlimited if the payments are made in the government’s own sovereign currency, which makes the whole notion of Argentina borrowing in dollars – thereby adding an unnecessary external constraint on growth – nonsensical as a future growth strategy.)
By the same token, if the American household sector repudiates debt by living in the house until the sheriff shows up without paying a mortgage, and then paying rent once they get kicked out, banks will then do what – shut new credit off to the private sector? Already done. In the meantime, the household sector (like Argentina when it repudiated its foreign debt) will have just increased the discretionary income and wiped the liability side of its balance sheet. Then it is just a matter of Mr Geithner figuring out another way to stress test the banks back into Treasury Dept. seals of approval, and voila, presto change!

Or maybe a debt repudiation of the magnitude we envisage might force President Obama to stop his seemingly endless appeasement of the Rubinite wing of the Democrats and embrace an approach which prevents US households from losing wealth of an amount equal to the negative equity they have in their respective homes, while the banks write down their assets to market.

Ironically, by overplaying their hand, the banks might be forcing the households to adopt an approach that will ultimately weaken the banks and expose them as the emperor with no clothes. They will take huge hits to their capital if faced with widespread debt repudiation. Now, I expect you’ll get a host of lawsuits and the very essence of the law of contract will come under attack if this scenario occurs, but the average American household might feel he has no choice and Obama might accommodate himself to these populist winds as he did in the Chrysler case, in effect overturning years of established bankruptcy law with no particular political cost to himself. At the very least, the more effectively people create a sense of urgency and crisis via these kinds of actions, the easier it will be for the President to push for progressive legislation, which overturns years of destructive policy making and finally delivers the change that many of us thought we were voting for last November.

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58 comments

  1. attempter

    The essence of law, including the law of contracts, has long been under absolute vicious assault from above.

    The system and its law are intended to do nothing but enable every kind of reckless rent-seeking crime, and then use the inevitable crash to empower further profiteering. When and if "recovery" occurs (at an even more intense level of wealth concentration and inequality), this is only meant to be the calm before the next storm.

    So the system has one basis and one intent: a vicious circle of bubble corporatism -> crash -> disaster capitalism -> "recovery" and the next bubble -> next crash -> next disaster plundering.

    Through all of this the people are nothing but a mine to be exploited and a dump for the waste.

    Meanwhile no "law" or moral restraint or by now even political restraint applies to anyone among the elite. They are free to commit every crime, indulge every whim, and shift every risk to their victims, and have every failure bailed out by those victims.

    They take great pleasure in doing this, and they enjoy publicly laughing and spitting in the face of their victims, the people.

    If the people finally realize this and refuse to play by rules which don't apply to the nabobs, this will be a sign of health and vigor. (Though still just a start.)

    I think we should begin educational programs on this.

  2. eh

    How about a savers' revolt? Against these low interest rates. Debtors, many of them irresponsible, largely got into debt voluntarily — it was a choice.

  3. Paul

    After Argentina abandoned the dollar peg, the peso collapsed, leaving the country with a horribly burdensome deflationary foreign debt repayment program foisted on it by the IMF (yet again making the world safe for US investment banks at the expense of everybody else) as a condition for further economic assistance.

    But then President Nelson Kirchner threatened to forego debt repayment to the country’s foreign creditors in the event that the IMF continued to insist on being repaid in a manner which didn't deflate the country into the ground.

    In effect, Kirchner called the bluff of the IMF and he won.

    Wow where to start? That's just (excuse the expression) horseshit. Argentina defaulted on its foreign debt before it devalued, several presidents before Kirchner. Kirchner repaid the IMF in full and ahead of schedule. Depositors in the Argentine banking system were not so lucky, dollar deposits being redenominated into pesos and withdrawals restricted.

    On at least one part of this article, the writer is just making stuff up. Doesn't bode well for the credibility of the rest of it.

  4. Purple

    If people feel that criminality is going unpunished at the top, it's more than possible that an unspoken debt revolt will happen at the bottom. If the wealthy don't have to follow 'the rules' , why should anyone else ?

  5. bb

    what revolt?
    most people are overweight and unwilling to miss the next of 164 baseball games and the associated food feast.
    please, come down to earth, dear revolt callers.

  6. Anonymous

    If US households start walking away en masse (ie even more than now), then I predict that lenders will start remembering that non-recourse only actually applies in a couple of states…

  7. vlade

    "households from losing wealth of an amoutn equal in …"

    Sorry Yves, but why shouldn't they? The wealth there was imaginary…
    Both banks and debtors should loose in this scenario.
    Especially since in US the mortgages are non-recourse, I don't see a reason why to protect the households here, when they already have the nuclear option.
    What should be concentrated on is help with selling/buying house (so say you can sell your house with negative equity, but the debt stays with you and automatically goes over as a lien on any other house you buy etc.).

  8. Anonymous

    enough of this non-sense as these homedebtor are made out ot be victims. many of these keep up with the jones lived and partied it up on someone else's buck. These are thew same dolts the bid the house prices up to dumb levels forcing those that value sometjhing to wait longer than necessary.

  9. Koshem Bos

    It's somewhat difficult to see how debtors will revolt without massive organization. When an individual doesn't pay a single mortgage payment, the weight of the system lands on her. The credit worthiness is hit because it is part of the yoke imposed by landlord vs vassal system we have.

    By the way, when someone loses her job, inability to meet financial obligation is not irresponsibility; it's a screwed up administration that decided to discard individuals and give $23 trillion to the banks.

  10. Anonymous

    In my opinion debtors revolt is the only way left for main street to defend themselves against a government that is very much own by financial oligarchs. A quick look at history shows that when government has been co-opted by a single powerful group and the public at large feels that is getting a raw deal revolt ensues. In the past it used to be violent. However, today the most likely response will probably be debt repudiation. Now how would that be started? My guess is via social networks such as face-book, twitter etc as ways of organizing the masses. So yes I think that main street could pull off an Argentinian if they get push to hard while the bankers keep getting all this free money. Kind of let them eat cake kind of revolt

  11. Martin, the Netherlands

    I'm not sure I get the writer's point correctly. The comparision to the german reunification is, I think, incorrect. That was a once-off historical occurence. The comparison with Argentina overlooks that Argentina has a history of failing to meet its obligations, but that it is not in Wall Street's interest to highlist this. If the U.S. consumer has too much debt, there is only one way out: by paying it back. This will take a considerable time, but then again, the U.S. consumer has had a great time with his McMansions and McSUV's. (I fully realize this does not apply to all of them!) A debtors'revolt? Unlikely. If it should happen, the entire U.S. banking system will collapse.

  12. Anonymous

    American sheeple (and worldwide sheeple, for that matter) are ignorant fools on the whole. Does the UK National Lottery still run those inane "It could be you!" commercials? Well, that sums up American thought.

    Americans think they are all Horatio Alger. They don't want to fight the system; they think they will succeed because of the system, not in spite of it.

    Look at all the media reports on "walking away" and "jingle mail", or the coverage of anti-consumers. Americans hate these people. They are "un-American".

  13. Stroebel

    It's a problem of collective action.

    As observed above, it's difficult to imagine American households standing up for anything other than to change channels for American Idol.

    Divided, they fall.

  14. John Doe

    "Debtors, many of them irresponsible, largely got into debt voluntarily — it was a choice."

    This is why there will be a debtors revolt. Because so many people are being used and told it's their own fault.
    What choice do people have when their jobs are paying less every year and their living expenses are going up? Over 50% of bankruptcies in this country are due to medical expenses and many of these people have health insurance. Just not insurance that will way when the crunch comes.

    The choice people are being given is train the person who is moving your job overseas, lose your job, and then choose to eat and be homeless or live off your credit cards while you try to find a new job. If this the choice that so many refer to?

    Yes the new opiate of the people (entertainment) is stopping the revolt. But that can't last forever. A lot of information thanks to the Internet is getting out to the people and they are beginning to stop believing in the blame the victim strategy.

    A debtors revolt will come it is inevitable. The question is the nature of the revolt. This country has a history of violence because it fails to address problems until it has no other choice.

  15. Siggy

    A debtors revolt would be an interesting occurance. It would first hurt the banks, then the importers, then the domestic producers and ultimately right back again to the debtors. What goes around will come around.

    Can we agree that as a nation and a society that we have borrowed more than we can service? If we can agree to that then we can begin to address the problem of our profligacy. In my view the equitable resolution is for lenders and borrowers to share the loss, 50/40.

    Why not do it that way? The lenders did not have to lend and the borrowwers did not have to borrow, well maybe there is a problem there.

    Elizabeth Warren made a strong presentation out at UC-Berkely asserting that the middle class is is under extreme pressure and that we, as a society, may be drifting toward a two class structure. This occuring we because it takes two income to pursue mobility into the middle class.

    If you follow her presentation closely you have to see that our current problem is far more than the criminality of selected individuals. It reaches far deeper into the structure of our class mobile society and the direction of its march is toward outright socialism.

    Madam Warren teaches contract law at Harvard and she has been consistently presenting a point of view that looks to the root cause of our problem.

    I do not favor outright debt repudiation. I do favor debt extinguishment where lender and borrower share the loss. I recognize that the loss is to a certain extent artificial in that the loan amount is not representative of an intrinsic value but that it is representative of an inflated price.

    Finally let us begin to see that the financial sector of the economy is central to a system that has production and a consumption components. This triptych concept can be conceptulaized as being three concentric circles with finance at the core. After all, it is money, in some form, that facilitates production, exchange and consumption.

    This particular piece has interesting elements but it is a long way from beginning to recognize the core of our problem.

  16. Mark

    If anything ever transpires, I imagine that the intellectuals will develop the theories and the debtors themselves will put into practice whatever suits them the best. The ideas will have to gain publicity somehow. It will be interesting…

  17. DownSouth

    Paul,

    While your pedantry is a little overwrought, your comment does nevertheless point up an error in Auerback's characterization of events. "Revolt" implies willful defiance, and there seems to have been none of that at the time Argentina defaulted on its foreign debt.

    Argentina defaulted on its public debt in late-2001 because the "government effectively ran out of money." At that time, president Fernando de la Rua was compliant to IMF demands and Argentina was following the austerity and reform measures dictated by the IMF. A president murdering his country's economy and its people so that foreign bankers can be repaid is hardly the stamp of "revolt."

    http://en.wikipedia.org/wiki/N%C3%A9stor_Kirchner

    Kirchner wasn't sworn in until May 25, 2003, and, as you accurately point out, the country was already in default. Kirchner, however, certainly took the ball and ran with it. His Minister of the Economy, Roberto Lavagna, basically shot the IMF the bird. Lavagna declared that his first priority now was social problems. Argentina's default was the largest in financial history, and ironically it gave Kirchner and Lavagna significant bargaining power with the IMF.

    The distinction I want to make is that, if U.S. households follow the same trajectory as the governemnt of Argentina, they will default not because they decide to, as an act of revolt or willful defiance, but because they have to, as in a lack of other options.

    This does not, of course, preclude U.S. households from "revolting" en masse. The decision on whether to revolt or not will largely depend on whether householders feel they are getting a raw deal or not:

    Rage is by no means an automatic reaction to misery and suffering as such; no one reacts with rage to an incurable disease or to an earthquake or, for that matter, to social conditions that seem to be unchangeable. Only where there is reason to suspect that conditions could be changed and are not does rage arise. Only when our sense of justice is offended do we react with rage…

    –Hannah Arendt, On Violence

    By the way, since we're playing school marm here, Kirchner's name is Néstor Carlos Kirchner Ostoić. I don't know where the "Nelson" came from. Perhaps it's an anglicization of Kirchner's name. But nevertheless I believe, from a Latin American perspective at least, "Nelson" to be inappropriate.

  18. OkieLawyer

    This is especially the case with respect to mortgage indebtedness; U. S. households have non-recourse mortgage loans and can walk away from their debts rather than pay them down.

    This is false. There are only a few states that have non-recourse mortgage loans. (And most of those states are limited in what loans constitute "non-recourse.")

    It is highly irresponsible to make such an assertion such as the one in this post. Furthermore, the false premise stated here leads to wrong conclusions about debt default.

  19. asphaltjesus

    I would argue that most consumer debts have been nationalized already. There may be statistics that show increased savings, but the nationalized debt side of that isn't in the picture.

    I'm reminded of the saying, "When you owe the bank $100,000 it's your problem. When you owe the bank $100 million it's their problem."

    The mega-banks shifted the problem to the taxpayer. Executive management brilliance all the way through. I'm sure all of the A-level bankers sleep just fine too. It's the taxpayers problem, not theirs.

    The fundamental issue remains the banks are holding whatever assets they have a secret at the expense of the taxpayers.

    For all of the individuals that came to believe the politically expedient version of 'free market ideology' this is the consequence. Free markets at work!

  20. Lavrenti Beria

    An excellent piece that simply had to be inspired by the outlook of economist, Michael Hudson.

    I would submit to you that a sea of angry faces on every boulevard in Washington, D.C. and a strike crippling the operation of every business in the United States just might render irrelvant the attitudes of Obama or the Congress toward events, especially so since it is they that are seen as colluding with the "hidden hand" to which you allude. Why should "populist anger" limit its goals to a debt holiday and ignore the systemic corruption that brought it about in the first place? A constitutional system and a political leadership that has allowed corruption to so eviscerate it that debt holidays are considered necessary for its citizens is one that in practice places no meaning on the franchise whatsoever. We need a second constitutional convention and the restoration of democracy every bit as much as we need debt relief. And the latter simply will not be possible without the former.

  21. DownSouth

    @Martin, the Netherlands said… "The comparison with Argentina overlooks that Argentina has a history of failing to meet its obligations…"

    "A debtors'revolt? Unlikely. If it should happen, the entire U.S. banking system will collapse."

    Martin, you must be a scientist. Since Hannah Arendt does such a great job of responding to your line of thinking, I'll let her do so:

    [T]here are, indeed, few things that are more frightening than the steadily increasing prestige of scientifically minded brain trusters in the councils of government during the last decades. The trouble is not that they are cold-blooded enough to "think the unthinkable," but that they do not think (emphais Arendt's). Instead of indulging in such an old-fashioned, uncomputerizable activity, they reckon with the consequences of certain hypothetically assumed constellations without, however, being able to test their hyposthesis against actual occurrences. The logical flaw in these hypothetical constructions of future events is always the same: what first appears as a hypothesis–with or without its implied alternatives, according to the level of sophisitication–turns immediately, usually after a few paragraphs, into a "fact," which then gives birth to a whole string of similar non-facts, with the result that the purely speculative character of the whole enterprise is forgotten… And the most obvious and "most profound objection to this kind of strategic theory is not its limited usefulness but its danger, for it can lead us to believe we have an understanding of events and control over their flow which we do not have," as Richard N. Goodwin recently pointed out…

    Events, by definition, are occurrences that interrupt routine processes and routine procedures; only in a world in which nothing of importance ever happens could the futurologists' dream come true…(Proudhon's passing remark, "The fecundity of the unexpected far exceeds the statesman's prudence," is fortunately still true. It exceeds even more obviously the expert's calculations.) To call such unexpected, unpredicted, and unpredictable happenings "random events"…is the oldest trick in the trade; the trick, no doubt, helps in clearing up the theory, but at the price of removing it further and further from reality. The danger is that these theories are not only plausible, because they take their evidence from actually discernible present trends, but that, because of their inner consistency, they have a hypnotic effect; they put to sleep our common sense, which is nothing else but our mental organ for perceiving, understanding, and dealing with reality and factuality.

    No one engaged in thought about history and politics can remain unaware of the enornmous role violence (as in revolt?) has played in human affairs, and it is at first glance rather surprising that violence has been singled out so seldom for special consideration.

    -Hannah Arendt, On Violence

  22. apachecadillace

    Two observations:
    1. A 'revolt' need not be an organized and concerted insurgency like the Tamil Tigers. A few radio show hosts promoting the 'zen move' of just staying put, paying zero, might inspire rather widespread but completely uncoordinated mortgage defaults in a volume the system is simply not set up to handle. It would also, ahem, bring into question the viability of any and all models projecting loss experience in any mortgage pool, regardless of rating.
    2. I'm not sure what happens when a homeowner simply stops paying the mortgage and doesn't take any further steps. Still employed. Current on the car loan and the credit cards. Just starts maxing out on the bankruptcy-protected 401(k) contribution in lieu of continuing to make payments on a non-recourse mortgage secured by a house not worth the balance on the mortgage. It might be a rational move more like one would expect from a Wall Street sophisticate than a Main Street rube. But it certainly wouldn't present a moral issue or involve the sanctity of contract, any more than there is a moral issue with a change in credit card late fees unilaterally imposed on a cardholder who has a large outstanding balance and nowhere to move it.

  23. Anonymous

    Just to put things in numerical perspective – to give all 120 million households a 10% increase in income (say $5K) is $600 billion. I have a feeling consumer debt service really isn't cause of problems here.

  24. Anonymous

    What we are seeing is the beginning of an involuntary failure to service our tax and debt commitments.
    This is not a conscious decision as in a collective revolt, and therefore, will be unpredictable and socially messy.
    There will come a time, after some delay that will fuel much anger, of a collective realization of having been betrayed by the corporate/government power brokers.
    The power structure will fight to maintain hegemony over the angry masses, which will lead us all into wondering about "living in such interesting times".

  25. tompain

    Okie, here is the list of non-recourse states:

    Alaska
    Arizona
    California
    Connecticut
    Florida
    Idaho
    Minnesota
    North Carolina
    North Dakota
    Texas
    Utah
    Washington

    Yes it is a small number of states, but they represent a gigantic share of the US population, and an even larger share of the most egregiously overpriced homes and resulting underwater mortages. California, Arizona, Florida…these are the bubble states. The fact that Ohio and Wyoming are not on the list is meaningless. One had no bubble, the other has no people. In the places where it counts, mortgages are non-recourse. And that is part of why the problem became as big as it did.

  26. Hugh

    That is a great quote by Arendt. It describes, what I am more familiar with being called, narrative construction. What Arendt does not include but what we see a lot nowadays is that far from being a logical flaw it is a ploy deliberately pursued.

    Whether you agree with Auerback's history or solutions, he is dead on that mortgagees and debtors in general are being to pay down bank debt, debt which I would add is the result of massive bank fraud. It isn't a sustainable or realistic solution. So something will give. It scarcely matters whether loans are recourse or not. If people can't pay on them, then they won't. That isn't revolt. It's math. I think Obama and his economic team are too limited to change course or adopt more effective policies. Rather worsening economic conditions will remake the landscape in which those policies are made. I continue to think the likelihood of depression in 2011 is very high.

  27. mickeyhickey

    The East-West German arrangement serves to illustrate the difference between the attitudes of the American and German governments. In Germany individuals get the same treatment as the banks in America individuals are not factored into the equation at all. Is America now a feudal state or is it entering into a period of feudalism ?

  28. William Mitchell

    Solution: constitutional amendment requiring legislators to read anything they vote on.

    At a single stroke, this would slash:
    - Candy for lobbies.
    - Legislative complexity.
    - The ratio of time spent fundraising vs legislating.

    Legislators, like American business, have outsourced everything but sales and marketing. They spend all their time raising money and advertising, while actual product is developed by lobbyists, produced by aides, and objectively evaluated by no one in a position of responsibility.

    Stated this way, it's no wonder we are in this mess.

  29. OkieLawyer

    @tompain:

    I am not licensed in California, so I can't give you the specifics of their law, but many of the homes you think are non-recourse, aren't.

    We had a discussion on it over at The Big Picture blog a few days ago.

  30. Anonymous

    I see a lot being said about recourse and non-recourse as it really matters. The truth is that if a good size of the population decides tomorrow to stop paying all their debts then there is no authority in this country or any other with enough power to enforce the non-recourse. As a result I would expect the government to come up with more creative ways to deal with the issue. Debt repudiation by the public at large would then be very similar to the scare methods that the banks used to get TARP money. JMHO

  31. rd

    This crisis hit the general public relatively quickly. I think most people are still trying to figure out just what happened and are trying to get by as best as they can.

    If the banks and the Administration are right, then this should all blow over fairly quickly and life can get back to normal. Little change will come out of this event.

    However, if there is a W- or L- recovery, then I suspect that there will be much more attention paid by the general public with political consequences similar to the 1930s. Being a banker or politician at that point in time would not be a good position.

    It will be interesting to see what happens with the economy over the next 15 months with mid-term elections approaching in 2010.

    Right now people are being diverted by inane health care debate issues but I suspect that the unemplyment rate will become very important moving into the new year both as an economic trigger and as a public sentiment driver.

  32. Anonymous

    Tompain is WRONG – I live in Texas (and am in financial services) and our home mortgages are NOT non-recourse. Where did you get that idea?

  33. Ed

    Looking at things purely from the standpoint of the government, mass (Great Depression like) unemployment is probably more of a threat.

    Because of the lack of savings, if you remove enough peoples' income streams by removing their jobs, the debt payments go as well. Plus the government collects taxes on wage earners automatically through witholding, that goes as well. Part time jobs to fill the gap will tend to be under the table stuff.

    Now "developing" countries operate economies with something like a third of the population effectively removed from the economy, barter economy, illegal housing, no payments that are tracked for the people in the shantytowns, but these economies are much smaller than the US economy.

    European countries pay their long term unemployed basically not to riot, but the money for this comes from higher taxes on the wealthy than the US wealthy probably can accept.

    The U.S. economy operates on a paradigm of mass participation in fairly marginally productive jobs, supplemented by easy access to credit, the money then gets recycled into taxes through witholding and consumer goods purchases. This is likely to turn out to be the lasting casualty of the crisis.

  34. Anonymous

    I'm disgusted with the comments trying to lay blame on the debtors for this crisis. A bank takes a risk when it makes a loan that it may not be paid back in full. That is why they charge interest. Do you think banks lend money out for free?

    Do people realize that we are ALL debtors since the government has been recklessly borrowing trillions on our behalf?

    We are at the end of a huge credit bubble that is bursting and the price to pay will be enormous. To lay the blame on mythical "irresponsible borrowers" rather than on the ones actually at fault is incredible.

    Another poster was absolutely right. We are an apathetic house divided and in the end we will all lose.

  35. Anonymous

    I agree wholeheartedly with 5:11 Anon's comment about not blaming debtors. Debtors are individuals who are high school grads with limited experience in business and often incapable of balancing a check book, let alone managing long-term finances linked to complex debt instruments like mortages (fixed or whatever, I would guess that no more than 5% of Americans can figure out a mortgage by themselves).

    Banks employ MBA's and PhD's and pay them hundreds of billions to make money any way they can (without get caught too redhanded). The banks spend millions on advertising telling us about their long, proud history and their extensive experience in managing money and lending money. The banks claim protection, benefits, and special rights as high priests of their arcane industry. The banks have millions of man hours and millions of case histories of lending on which to base their decisions.

    A homebuyer might buy three homes in his life. The bank will finance that many in one hour. The onus should be on the banks. They fucked up, not some semi-mathematically literate cocktail waitress who was convinced that a 5% rate on a $750k mortgage would be easily covered by her tips.

    We are living through the greatest fraud in history. It's a conspiracy in the sense that many of those in power in DC and Wall Street know exactly what is going on. But it's not just, for example, Goldman Sachs. It's everyone in finance and everyone in politics.

    There are times when a house is so infested with termites that killing them won't save the house. The only solution is to burn it down and start all over.

  36. Anonymous

    Millions of comprehending “consumers” LUSTED for more “house” than anyone ever needed, bought at what they KNEW to be a ridiculous price on the theory that an even bigger fool would ultimately pony up, and extracted additional $$$ “equity” as a side-dish. A nation’s fate lies in the character of its people, and the scariest aspect of this farce is that so few are willing to recognize or admit where SO MUCH responsibility lies.

  37. carol

    Ed said:
    "European countries pay their long term unemployed basically not to riot, but the money for this comes from higher taxes on the wealthy than the US wealthy probably can accept."

    Where did you get the impression that Europeans pay taxes for unemployment expenses to prevent riots? In which EU country do/did you live? I'm really curious.
    On the contrary, it is seen as a necessary requirement for a civilized society.
    It is NOT: oh, I pay some taxes to avoid a riot/pitchfork in my face.
    It is: people who are temporarily out of a job, should still be able to pay rent/mortgage, have a good meal etc., i.e. I pay some taxes out of compassion with others.

    Also, In EU it are not just the wealthy who pay taxes! The middle class also pays. In some countries households pay 50% of household income above 50.000 euro. In the US wealthy starts at 250.000 dollar per annum, and in some discussions (e.g. health care surcharge tax) at 1 million per annum.

    Anon 5:11 said
    "I'm disgusted with the comments trying to lay blame on the debtors for this crisis. "

    Debtors are not getting blamed for this crisis, at least not in the comments above!
    But some debtors played a role.

    Anon 5:49 said:
    "A homebuyer might buy three homes in his life. The bank will finance that many in one hour. The onus should be on the banks."

    ????
    Buying a house will for most of us be the most expense item we ever buy. And most of us do not buy cash, but become huge debtors. Irrespective of education level etc.: if one is about to engage such a big financial commitment, one really has to understand the ins and outs and consequences.

    To both anons: please do realize that none of the currently underwater mortgage debt owners (often wrongly called homeowners) were forced to buy a house. They could have rented! Is there anything wrong with renting???? Oh wait, many of these people wanted to be part of the upside of the housing bubble. That should not be an excuse!

    Also, please realize that a lot of the currently underwater mortgage debt holders used their house as ATM. No one forced them to go on a cruise and pay for it with additional mortgage debt.

  38. VG Chicago

    Martin, the Netherlands: you are incorrect saying the only way out for the US consumer is to pay off debts. Unlike Europe, in America if one defaults on debts, that goes on his/her credit report for 7 years, and after 7 years miraculously disappears as it never happened. Tell me then, why would a US consumer have to pay back debts in times such as these?

    Vinny G.

  39. skippy

    Re: lender/debtor fracas, WINNER culture, that is all.

    @Vinny G…AMA 5 Guidelines, 14% WPI with an additional 3% per table 18.1. Next week I have the Honor of meeting with an esteemed colleague of yours Professor Harvey Whiteford, who was recently employed by the World Bank DC and is certainly prolific in his published works .

    Skippy…I'll send your regards.

  40. VG Chicago

    Carol said: “Where did you get the impression that Europeans pay taxes for unemployment expenses to prevent riots? In which EU country do/did you live? I'm really curious.”

    How about France, Germany, Greece, UK, Italy, Portugal, and now Spain and Ireland.

    May I suggest you try to get your information from sources other than EuroNews and France 24?…LOL

    Vinny G.

  41. VG Chicago

    Once word starts getting around that your neighbor bought his new BMW on maxed out cards he already defaulted on, and that he also stopped paying his mansion’s mortgage 2 years ago and the bank did nothing, it will go viral from there. Everybody will do it. Call it a revolt if you will, but from a psychology point of view it will only be another form of keeping up with the johnses type of behavior.

    Vinny G.

  42. VG Chicago

    Skilly: give my best regards to Prof. Whiteford. He’s a legend in the field.

    We need somebody like him to declare the entire USA a psych ward, and then start enforcing some kind of treatment on us :)

    Vinny G.

  43. skippy

    @Vinny G: will forward your prognosis, and see about delivery mechanisms.

    Australia would be a great test bed as we have been increasingly mimicking the States behaver or as a control group >|o >|o.

    Skippy…Dane Bramage or a new beginning, I'll take the later.

  44. K Ackermann

    Not just debt repudiation, but maybe a good ol' fashioned run on the banks just because we can.

  45. joebhed

    a debtor's revolt?

    against whom? or, what?

    against the the debt-money system?

    against the cartel of bankers that control the debt-money system in a true ponzi-scheme of parasitical fractional-reserve banking?

    why would the debtor's revolt against that?

    The Money System Common

  46. Anonymous

    Lack of confidence in currency would cause the consumers to horde commodities and not spend anything except on bare essentials. Caged rats not able to spin the wheel and numb to stimulus.

  47. Bruce Krasting

    A recent Bloomberg report showed that as many as 47%!! of mortgages were underwater in S. Florida. With that number in mind what is the national average?? How about 20%? I think that is about right.

    Well that comes to $2.5 Trillion of underwater mortgages. If you add to this number CC debt that can't be paid and other consumer debt it easily goes over $3 Trillion.

    There is no fix to that problem. Not in the next twelve months. It is too big. The default rates/bankruptcy rates have no where to go but up.

    This article suggests that debt repudiation is a possibility. Wrong. It is a reality. It is happening every day. The only question is how broad it will become.

    This issue raised on whether the mortgage is recourse or not is a non issue. NY is not on that list and people are walking on homes, sending in the keys and nothing happens. If you sign a deed in lieu the worst thing that can happen is you get a bad FICO score.

    Trust me that does not matter. It used to be this FICO issue encouraged borrowers to be "good". That was because if you were good you got more credit. That is over. The banks have cut 100rds of billions in lines and credit. There is no credit any more so FICO does not matter.

    Does anyone really think that the US is going to go after someone who walks on a CC in 2009?? There is no way that is going to happen. You would have to put 1/3 of the population in debtors prison. It is simply an empty threat.

    You see those folks screaming at the Town Hall meetings re health care?? That stuff is not staged. People are crazy mad. They are willing to stand up and yell at anyone. Do you really think these people are going to pay their underwater mortgage and 20% on the CC bills?? Not a chance.

    America is angry. The corporate side of things has gotten all of the attention while the citizens get nothing but higher bills and more taxes. The banks have cut our lines and increased their fees for everything. Americans hate their banks right now.

    The biggest systemic risk that we face is debt repudiation. It is happening before our eyes and is spreading very quickly.

  48. Anonymous

    Labor has been pretty well crushed but if there's ever been a class in desperate need of collective action, it's debtors. Progressives floated the idea of debtor's clubs a couple of years ago but it got lost in the sauce. I don't know why SEIU or PIRG doesn't broaden their outreach to our burgeoning peon class. It's a slam-dunk, as they say – instant crisis.

  49. Anonymous

    Repudiation is not needed, just an AARP-type association that renegotiates repayment terms for its members, demanding haircuts and shelling non-compliant bankers with mediagenic atrocity stories. It would make the Sixties look like the garden of earthly delights.

  50. attempter

    Thanks for that anon @ 9:29.

    Labor is temporarily crushed, but it doesn't have to be that way.

    Let me re-recommend Yves' recommendation of Fred Goldstein's excellent free e-book, Low Wage Capitalism:

    http://www.lowwagecapitalism.com/Low-WageCapitalism-lores.pdf

    This book, correctly I believe, says the basic strategic principle should be that the rank and file are ready for action, if there is leadership willing to provide it.

    I would extend this to the idea of bottom-up debt jubilee.

    Unfortunately, so far such leadership has been lacking.

  51. Anonymous

    OkieLawyer,

    It doesn't seem Florida belongs on the non-recourse list, either.

    I've read Florida lawyers say otherwise about non-recourse here, too. The VA says all VA mortgages sold to Freddie Mac have to be recourse.

    As usual with broad brush one paragraph legal advice, that linked posting listing non-recourse mortgage states needs lots of fine print footnotes. At least one footnote per state imo.

  52. VG Chicago

    Skippy: definitely Australians have been mimicking Americans, and even you did us one better in some areas. You do have some nice beaches though, which more than make up for the deficiencies… :)

    Vinny G.

  53. VG Chicago

    K Ackermann: Indeed, debt repudiation and a run on the banks should do the trick. Nice thinking! You must be a financial genius! :)

    Vinny G.

  54. Bruce Krasting

    Okie lawyer: We face a national problem. The idea that someone walks in State A without consequence while a similar person in State B suffers dearly will not work. There is no equity to that and laws in individual states will be tested.

    This clear inequity points to a broader problem. Creditors with some banks are are able to work things out. If necessary leave the property with little or no consequence. It depends on who holds the paper. Paper is being bought for 25% and settled fast with creditors for 40-50%. So money is being made on some of the old toxic stuff. The 'market' is solving the problem. The original bond holders sold out long ago.

    On the other side is the $7 T of debt that is owed to either Fannie,Freddie,Ginnie or FHLB.

    They let borrowers lower interest rates. But there is no "walk away" option. No principal reduction either (they add principal onto the loan in order to balance the books). So far they have not followed the private sector. If they open that door it will be impossible to control. If they don't then Uncle Sam is going to end up with lions share of bad IOU's. I cannot see a situation where our benevolent Uncle goes into a mass foreclosure process. No chance.

    These laws have no teeth.

  55. Anonymous

    Sorry, but I have little sympathy for most of the debtors. No one forced them to sign on the dotted line for the stuff they bought that they can't now pay for. I never saw any big, ugly evil bankers rushing around with guns holding people up and saying, "Take this loan, you MF, or I'll plug ya!" If you want to tell me you did, bring your lunch as I'll need a lot of convincing.

    Everyone who is in over their head spent the money themselves, wanted to do it, and is now just bitching because the bill is coming due.

    The people like me, who looked at this crap for years and wondered how in the heck people making far less could afford far more, we were the ones who didn't spend beyond our means. Would it have been nice to have the McMansion and a BMW? Oh yeah! I just wasn't willing to take the chance of getting that far out on a financial limb. I wanted to be able to sleep at night.

    It didn't take mathematical genius to figure out that one's cash wasn't going to match the incoming bills if you bought a house for 4x or 5x your annual income. Having bought a number of houses, I know darned well that they tell you what it's going to cost you every month and what it will have cost you in total at the end. If they couldn't tell you that because you were stupid enough to bite on one of those Option ARMs or some other shape-shifting nonsense, too bad for you. Due diligence works on both sides of the mortgate table.

    I don't think we should have bailed the banks out either, but they at least had a profit motive. People who walk into gambling casinos come out losers most of the time. The banks gambled on a lot of losers they should never have loaned money to. Bad move on their part. However, those losers wanted the cash, asked to get it, and signed the agreement willingly and happily. Now that the game has turned against them, they want the taxpayer or the legal system to bail them out? Not only no, but HELL NO!

  56. Wrath

    So we all agree that market economy is the only way. The linchpin of market economy is that when a plc in insolvent it goes bust and the shareholders and creditors are wiped out or at best the bondholders can get 10-12% on the $ or swap the debt for 99% of the equity.

    At least 80% of the banks by capitalisation are obviously underwater, including probably 18 of the top 20. Therefore nitpicking about homeowners responsibility is a waste of time. Considering the likelihood of repayment, sooner or later impaired assets will sink the banks, but sooner would be much more desirable than later, cause later might well be to late to avoid a bloodbath (real blood, not red ink)

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