New York Times’ Bank-Boosting, Neoliberal-Excusing Story of the Global Debt Hangover

The lead story at the New York Times today, Toxic Loans Around the World Weigh on Global Growth by Peter Eavis, gives a one-sided view of the problem of too many bad loans around the world that have yet to be recognized and resolved. It’s an economically warped account that leaves important policy options off the table.

The big tell is that the article has nary a mention of the idea of restructuring loans, which is the time-honored way that banks deal with problem loans. A former McKinsey partner who was in charge of workouts at General Electric, which had a huge financial services arm and a boatload of drecky debt in the early 1990s, named one of his conference rooms “Triage” and the other “Don Quixote”. And in some sense, that illustrates the poles of how to deal with an underwater borrower: see if they can survive or not, and deal with them accordingly, or engage in various “extend and pretend” strategies. Another bankers’ saying is “A rolling loan gathers no loss,” meaning you can keep making a hopeless borrower look viable, sort of like propping up a corpse and putting enough perfume on it to hide the stink, by giving new loans so they can keep paying interest (see Greece as a textbook case).

Workouts? What Workouts?

Here is the first discussion of “what to do about the problem,” starting well into the article, at paragraph nine:

In theory, it makes sense for banks to swiftly recognize the losses embedded in bad loans — and then make up for those losses by raising fresh capital. The cleaned-up banks are more likely to start lending again — and thus play their part in fueling the recovery.

But in reality, this approach can be difficult to carry out. Recognizing losses on bad loans can mean pushing corporate borrowers into bankruptcy and households into foreclosure. Such disruption can send a chill through the economy, require unpopular taxpayer bailouts and have painful social consequences. And in some cases, the banks might find it extremely difficult to raise fresh capital in the markets.

First, it always makes sense to recognize the losses. They exist. Not recognizing them is like adjusting your home scale to -30 to pretend that you don’t have a weight problem. The Japanese, at the very early stages of the US financial crisis, gave an uncharacteristically blunt warning that their big mistake and the reason they were then mired in a lost decade-plus, was failing to clean up their bad bank loans.

Second, and more important, there’s no mention of the idea of debt restructuring, of the bank taking half a loaf and moving on. Notice how the only options depicted are corporate bankruptcies (which outside the US are generally liquidations, and this story focuses almost entirely on foreign debt) and foreclosures. While banks have the legal right to pursue these options, if the borrower has a decent level of income, a restructuring is almost always the better course of action. Not only are the outcomes typically better for the lender, they are also better for the borrower, and thus reduces the economic costs to both parties. This is one reason why the US policy during our mortgage crisis was disgraceful and short-sighted. The government had the power to force banks and mortgage servicers to undertake outside the box solutions, because mortgage lender had made such a mess of how they had handled mortgage documentation that in many, arguably most cases, they did not have the right to foreclose. The government thus held the whip hand: if it let the mortgage chain of title mess continue to metastasize, it would eventually brig down the mortgage industrial complex. The banks needed official help in a very large way.

But the Administration went all in for papering over that problem, giving the banks what amounted to a second bailout by letting them out of institution-destroying liability on the cheap, and not insisting that they work out mortgages (in particularly, give principal writedowns).

Third, and we’ll turn to this in more detail soon, the article leading up to this point makes lending sound as if it is a primary driver of “recovery” (the “play its part” language is weaker than the depiction in the preceding paragrpahs). We’ll debunk that idea.

In other words, that extract, and indeed, almost the entire article, gives the impression that the only options with a debt overhang are forcing borrowers into penury or bank bailouts. Only in the third to the last paragraph do we get a passing mention of other possibilities:

In some cases, the delay arose from a reluctance, at least in part, to force people out of their homes. Even though Ireland’s biggest banks suffered huge losses after the financial crisis, they held back from forcing many borrowers who had defaulted out of their homes. In recent years, the Irish government has pursued a widespread plan that aims to reduce the debt load of financially stressed homeowners. Such forbearance appears not to have weakened the Irish economy, which has recovered at a faster rate than those of other European countries.

Recall that Ireland has the most outsized real estate bubble, with private credit at a staggering 12X GDP. Eavis almost seems puzzled that Ireland did better than other countries by restructuring debt, which he describes using the atypical term “forbearance,” which is more commonly used to describe when regulators let their charges get away with breaking rules. (There are other reasons Ireland “recovered” more quickly that are not pretty, and not open to other countries, like large scale emigration).

And there’s no mention of Iceland, which had a staggeringly large debt bubble, and was forced into recognizing the losses immediately due to the collapse of its central bank. Iceland prosecuted its bankers and cleaned up its banks, not just the loans but also the boards and top leadership. Even though its degree of recovery is often overstated in the media, it’s still done very well given the severity of the underlying problem.

No, Virginia, Banks Do Not Drive Growth

Another big problem with the subtext of the story is that it depicts the problem of excessive debt being a problem for growth primarily due to its impact on bank lending, by reducing their capacity to make new loans. The article does mention in passing how companies and borrowers struggle under heavy debt loads. But it fails to translate this into macroeconomic effects, which has been set forth clearly by economist Richard Koo in his description of “balance sheet recessions.”

When businesses and individuals are overburdened by borrowings, they prioritize paying down their obligations over other spending, even if that “spending” might be an investment that would put them ahead overall. They recognize that their debt servicing levels have made them vulnerable to other shocks, so getting their borrowings down to a more viable level amounts to risk reduction. But thus sensible behavior on an economy-wide basis dampens growth.

We can see a classic example of how this works in the US with student debt. Enough young people are burdened with student loans to such a degree that it is underminimg their ability to leave home, get married and start families, and buy homes. That in turn has dampened the increase of the housing supply, and led it to be more in lower cost, typically rental “multifamily” buildings, meaning apartments, rather than houses. Housing has traditionally been the driver of US growth cycles; the weak housing recovery is one of the reasons the current growth path is so anemic.

So the real story of why debt hangovers hurt growth operates mainly through the demand side: corporations and individuals that are belt-tightening, or worse, faced with catastrophic failure, rein in their spending. But that’s not what you hear from the Times:

Bad debts have been a drag on economic activity ever since the financial crisis of 2008, but in recent months, the threat posed by an overhang of bad loans appears to be rising. China is the biggest source of worry. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that is equivalent to half the size of the country’s annual economic output.

Official figures show that Chinese banks pulled back on their lending in December. If such trends persist, China’s economy, the second-largest in the world behind the United States’, may then slow even more than it has, further harming the many countries that have for years relied on China for their growth….

In Europe, analysts say bad loans total more than $1 trillion. Many large European banks are still burdened with defaulted loans, complicating policy makers’ efforts to revive the Continent’s economy. Italy, for instance, announced a plan last week to clean out bad loans from its plodding banking industry.

Elsewhere, bad loans are on the rise at Brazil’s biggest banks, as the country grapples with the effects of an enormous credit binge.

In all of this, you see an focus on the symptoms – banks with high levels of debt – rather than the diseases. In China, for instance, it has been a government committed to growth levels that it sees as necessary to maintain the legitimacy of the officialdom, but are no longer viable under China’s investment and export-driven growth model. Investment has hit 50% of GDP, a level that is unsustainable. On an economy of China’s scale, large economic losses were inevitable. Because this investment binge was debt funded, that means big losses to lenders (which are not just banks but include participants in China’s large shadow banking system).

This paragraph epitomizes the misguided position of the article:

In good times, companies and people take on new loans, often at low interest rates, to buy goods and services. When economies slow, these debts become difficult to pay for many borrowers. And the bigger the boom, the more soured debt that is left behind for bankers and policy makers to deal with.

First, this section makes consumer borrowing sound virtuous. For the most part, it isn’t. Academic studies have repeatedly found that household debt levels are negatively correlated with economic growth. In other words, this depiction of individuals borrowing to fund consumption is the neoliberal model that has been in place in the US since the early 1980s: of having consumers rely on borrowing to achieve rising standards of living rather than wage growth. We hit the limits of that approach with the 2008 crisis.

Second, as we’ve said repeatedly, businessmen do not borrow and invest because money is on sale. They borrow and invest because they see a business opportunity. They are more likely to see opportunities when the economy is strong than when it is crappy. The availability of credit can thus constrain business growth, but cheap money alone won’t do much to promote it.

The one exception to that story is businesses where the cost of money is their biggest, or one of their biggest costs. What businesses are like that? Financial speculation or the purchase and sale of highly levered assets, like real estate. So it should not be surprising that low interest rates have goosed asset prices rather than stimulate real economy growth. The Fed was not so totally clueless as to not understand that. But it convinced itself that rising stock and housing prices would lead to a wealth effect, that would in turn lead to more spending. But since wealth in concentrated in the upper income strata, that at best amounted to trickle down economics. That has never been very successful, as recent results confirm.

And What About Policy Options?

The article fails to acknowledge that Europe’s continuing banking mess is due in large degree to the fact it has no satisfactory mechanism for bank resolution, and its banking union is flawed and incomplete to a degree that it if anything increases the odds of financial crises (more on this in the next few days). And this part is troubling:

Wherever governments and central banks unleashed aggressive stimulus policies in recent years, a toxic debt hangover has followed

It treat “stimulus” as if it were all of a muchness, and in the context of this story, where there is nary a mention of fiscal stimulus. The only references in the story are to cheap lending. That leaves readers with the impression that the sole medicine is ineffective, even counterproductive monetary stimulus.

While we are glad to have the Times confirm a point we have been making for years, that monetary pump-priming was not going to help, and would at most boost bank profits without doing much for the real economy, it’s disturbing to see this article put on neoliberal blinders and not even admit that deficit spending is an option, and actually would have been a vastly better course of action than the cheap-money approaches taken. The best course of action, as we stressed during the crisis, would have been to nationalize the sickest banks, push banks across the board to restructure loans, recapitalize banks as needed (with new boards and executives put in place) and have aggressive deficit spending offset the downdraft from working out the loans.

But again, in our neoliberal, and therefore Panglossian best of all possible worlds, deficit spending is a dirty word. The Times, whether by accident or design gives a very clear account of the cost of global malaise that has resulted from failing to deal with the debt crisis head on and bring the best tools to bear on it.

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  1. dk

    Wherever governments and central banks unleashed aggressive stimulus policies in recent years, a toxic debt hangover has followed

    Because of poorly structured stimulus vehicles. Direct investment in infrastructure is less prone to fraudulent abuse than pumping stimulus through indirect channels which allow delivery entities to skim value on the way in, diluting the net stimulus into the economy.

    1. Larry

      In fairness, the US did use measures of direct spending. It has escaped memory now, but early in the Obama Admin there were signs everywhere promoting federal infrastructure spending. It wasn’t nearly enough and has failed to address critical needs, but it was not nothing. Extending unemployment benefits was also a boon to citizens and the economy. But as Yves correctly points out, we would have been far better served by writing down bad debts and prosecuting financial criminals running large banks. Alas, those are important people with thin skin and a lofty place in society. How can we upset that apple cart?

      1. dk

        Absolutely agreed on both counts. The Times article makes a blanket statement (and also asserts causation from a not well substantiated correlation). Governments can deliver, and have delivered, overall healthy and responsible stimulus programs.

        The quasi-morality of the imperative that “all debts must be paid!” (as in, in full; and the ones owed to me come first!) is a cornerstone, perhaps even the foundation, of oligarchy. The benefits of participation are made contingent on a) assumption of complex obligations, and b) complete fulfillment of those obligations (while their complexity unfolds and deepens). This is a recipe for manipulation, coercion, and effective subjugation.

        Ugh, I sound like such a demagogue, somebody shoot me.

        1. WorldBLee

          Au contraire, you sound like grounded thinker of the type who should not be lined up against the wall if/when the revolution comes. ;-)

  2. Keith

    The Neo-liberal ideology swept the world and it is now destroying itself.

    “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” Warren Buffett

    The 1% went to war on the 99% (aka the global consumer), very silly really.

    Before they win, everyone loses.

    China is now the workshop of the world.

    China’s problems clearly illustrate the lack of global demand.

    China manufactures its products from imported raw materials from other emerging economies, so these in turn suffer from the lack of global demand for China’s finished goods.

    Global commodity prices and the Baltic Dry Index are at record lows illustrating this collapse in demand.
    Capitalism is like Siamese twins at war with each other.

    The 1% and 99% always fighting each other to get more, but if either side win they destroy each other.

    The 1% were in the ascendency in the 1920s and blew it up with a Wall Street Crash in 1929.

    The 99% were in the ascendency in the 1970s and blew it up with constant strikes making individual nations uncompetitive.

    The 1% are in the ascendency again and have already caused another Wall Street Crash (2008) plunging the world into a global recession that seems without end.

    The 1% haven’t worked out that they have gone to war against the consumers that buy their products and services.

    Obviously this was all spotted by Marx a long time ago, but he had never seen the results of the 99% in power (Pol Pot’s Cambodia, Stalin’s Russia, Mao’s China, etc …). He came from a wealthy family and was only too aware of the greed, self-interest and hypocrisy in his own class. It doesn’t seem to matter which ideology you try and follow the psychopaths always end up in the positions of power.

    Capitalism is an endless fight between the two sides, but neither side can win, to do so destroys themselves.

    A more balanced approach is needed but the very thing that makes Capitalism work, self-interest and greed, ensures neither side is ever happy with their lot and always wants more.

    (Latest update – The demise of the Western consumer has affected demand for Chinese products and their Keynesian infrastructure investment has run out of money due to the length of the downturn in the West.

    The lack of demand for Chinese products and the end of its Keynesian, debt fuelled stop gap has fed back into global commodity prices.

    This is affecting commodity producers in Latin America and Africa.

    Spain and Portugal are massively invested in Latin America and the losses are starting to mount.

    The vicious circle is now complete and can only spin faster and faster until the global consumer gets some money to spend.)

    Current global stock market losses this year – over 1 trillion.

    The end is nigh for this Capitalism that eats itself.

    1. Keith

      40 years ago most economists and almost everyone else believed the economy was demand driven and the system naturally trickled up.

      Now most economists and almost everyone else believes the economy is supply driven and the system naturally trickles down.

      The new upside-down economics is a complete disaster.

    2. Jef

      The only problem with your analysis is;

      “The vicious circle is now complete and can only spin faster and faster until the global consumer gets some money to spend.)”

      Ramping consumer capitalism means ramping up resource extraction, transporting, manufacturing, in essence all of industrial activity and its concomitant waste stream all of which are hitting up against major constraints.

      Can we please look a little deeper into possible solutions other than getting back to what is killing us in the first place?

  3. Keith

    Take money creation away from bankers they are globally incompetent.

    The global monetary system was designed by bankers for bankers and they get a cut at every step in the process of money creation.

    They are given the privilege of creating money out of thin air (fractional reserve banking), which they can then lend out and charge interest on.

    There is only one task they have to carry out and that is to lend the money prudently to people that can pay them back plus the interest.

    Could it be any easier, with no manufacturing, supply and distribution chains to worry about?

    What are bankers like at prudent lending?

    “What is wrong with lending more money into the Chinese stock market?” Chinese banker recently

    “What is wrong with lending more money into real estate?” Chinese banker last year

    “What is wrong with lending more money to Greece?” European banker pre-2010

    “What is wrong with a NINA (no income no asset) mortgage?” US banker pre-2008

    “What is wrong with lending more money into real estate?” US banker pre-2008

    “What is wrong with lending more money into real estate?” Irish banker pre-2008

    “What is wrong with lending more money into real estate?” Spanish banker pre-2008

    “What is wrong with lending more money into real estate?” Japanese banker pre-1989

    “What is wrong with lending more money into real estate?” UK banker pre-1989

    “What is wrong with lending more money into the US stock market?” US banker pre-1929

    Globally incompetent at the only job they have to do.

    Rather than clean up after their reckless lending or try and hide their problems with loose monetary policy by Central Banks remove their ability to create money.

    Give the world a chance.

    1. perpetualWAR

      Apparently you haven’t heard, the bankers in the U.S. are asking “What is wrong with a NINA loan?” All. Over. Again.

  4. Keith

    “The Japanese, at the very early stages of the US financial crisis, gave an uncharacteristically blunt warning that their big mistake and the reason they were then mired in a lost decade-plus, was failing to clean up their bad bank loans.”

    The timeline for the collapsing global economy.

    Japanese banks had been on a maniacal lending spree into real estate and the bubble popped in 1989. Rather than own up to losses and admit their bankers were fools, they covered up the problems with loose monetary policy.

    Japan then had the rest of the world to trade with that was still doing well but it never really recovered.

    US banks went on a maniacal lending spree into real estate and the bubble popped in 2008. Rather than own up to losses and admit their bankers were fools, they covered up the problems with loose monetary policy.

    US banks used complex financial instruments to spread this problem throughout the West.

    Rather than own up to losses and admit their bankers were fools, the UK and Euro-zone covered up the problems with loose monetary policy.

    Japan, the UK, the US and the Euro-zone had the BRICS nations to trade with that were still doing well but they never really recovered.

    The BRICS nations are now heading for/in recession.

    Doesn’t look good does it.

  5. mk

    Three years ago I started a small business caring for animals. My business grew 40% last year. I heard an ad on the radio about a business startup bootcamp where people with new businesses (had to be in business two years or less) that I thought was being offered by the city, but it was offered by a third party who was supported by a state senator by offering space to hold these meetings. This was a 9 week program, different presenters every week, and weekly homework to create different parts of a business plan. I met with one of their presenters who was an accountant, but he didn’t ask me any questions about my business. He told me that what I needed to do was sign up for his online accounting system/business plan generator for a monthly fee, and pay him $2,000 for a biz plan. I accepted his pamphlet and told him I’d think about it. The next presenter I met with explained that the only way to expand my business was to get a loan – again, never asked me questions about my business. I got the message that this was not about growing my business, but was a way for this third, fourth, and fifth parties to sell loans.

    I heard on KPFK (pacifica station in LA area) a program by Richard Wolff where he talks about successful worker coops. I tried contacting Richard Wolff, he’s too busy to even acknowledge my email. I am too small a business for people like this to pay attention to. I would love a 9 week program for small businesses where I could learn how to organize a worker coop. I think my kind of business is perfect for it, but I have no expertise and think it’s too risky to try to do it by myself without screwing it up.

    I wish the senator and state of California and America would offer real help to small businesses to grow in a healthy way without loans. I gave up using credit a long time ago and I never want to go back to that daily, weekly, monthly drudge of paying off stuff I’ve already had the pleasure of using long ago. Being debt-free is real freedom and very difficult to give up.

    1. Steve from CT

      Don’t waste your time trying to deal with Richard Wolff. I knew him when he lived in CT and he is a total phony. I seriously doubt that he has an actual program to help people like yourself set up a worker’s coop. Even if he does, it will cost a lot of money and won’t be of much practical help. There used to be a coop organization that would provide help but I have no idea whether it is still in existence.

    2. knowbuddhau

      Here in Washington, I’m setting up a coop with the help of the Northwest Cooperative Development Center nwcdc [dot] coop. Maybe there’s something in your area?

      And diptherio gave me a link to geo [dot] coop, you might find something there.

  6. Gantal

    “In China, for instance, it has been a government committed to growth levels that it sees as necessary to maintain the legitimacy of the officialdom, but are no longer viable under China’s investment and export-driven growth model. Investment has hit 50% of GDP, a level that is unsustainable.”

    It appears you’re using media sources for this. Official government sources and international agencies tell a much different story. China’s growth model is sound and healthy. Its investments are profitable and its bonds are well covered. Far from being export-driven, China is underweight in the world of exports and is less than half as dependent on exports than, say, Germany.

    Investment, at 50%, is fine for a country with little debt, a highly educated workforce, rapid growth and average wages below Kazakhstan, Bulgaria, and Colombia. Theres a long way to go and now’s the time to put the pedal to the metal.

    As to “a government committed to growth levels that it sees as necessary to maintain the legitimacy of the officialdom”. Not really. It’s overflowing with legitimacy right now. 95% policy support, 80% trust of the media, and a hugely popular cleanup campaign. The CCP could easily handle five bad years in a row.

    Here’s some further reading: China’s debt fragilities are over-stated. They don’t threaten the model. [In real life, corporate net debt is near zero, private savings are $3 trillion, foreign reserves $4 trillion]. The proof is in the numbers. Not just headline growth, but stable and low inflation, strong wage growth and rising tax revenue.

    Debt to GDP Chart .

    Bad Loans: China’s Banking Regulatory Commission says that the trend of rising bad loans, or non-performing loans, is within expectations, and overall risk is under control. Official data showed non-performing loan ratio at China’s commercial banks rose to some 1.6 percent at the end of September, while loan-loss provision coverage ratio, the ratio of provisions held to gross non-performing loans, stood at some 168 percent. The total of NPLs across Europe is about 1 trillion euros ($1.1 trillion), equivalent to the size of Spain’s annual gross domestic product (GDP) and 7.3 percent of the EU’s GDP. Non-performing loans (NPL) across Europe’s major banks averaged 5.6 percent at the end of June, down from 6.1 percent at the start of the year. But that compares with an average of less than 3 percent in the United States.

    From 2010 to 2014, the growth pace of the public sector’s net assets averaged 8.6 percent, according to the finance research institute under the People’s Bank of China, the central bank. Total net assets of China’s public sector, including government executive departments and state-owned enterprises, was 113.8 trillion yuan (US$17.2 trillion) by the end of 2014. The research also showed that the debt risk of the public sector is under control, with debt growth dropping from 26.6 percent in 2011 to 13.2 percent in 2014.

    China is flooded with new capital – a huge US$3T a year (and keeps rising):

    Don’t write off the yuan: 4 reasons the RMB is doing fine:

    According to the Salary Guide from Hays Plc, about 44 percent of the 1,200 mainland employers said they would offer salary hikes of 6 percent to 10 percent this year. About 29 percent said they plan to hike wages by 3 percent to 6 percent, while nearly 16 percent intend to give salary increases in excess of 10 percent. China’s salary increases are the most generous, finds Asia …
    Chinese Are the Most Optimistic People in the World.

    Analyses of all the 41 industrial sectors will show only eight of them are suffering from heavy overcapacity and negative growth. The newly emerging and high-tech industries, including information technology, telecommunications and electronics, aerospace, railroad rolling stocks and pharmaceuticals are all performing well. And the traditional industries, including food processing, textiles and apparel, furniture, leather goods, rubber and plastic products, and automobiles and auto parts, are growing steadily. The latter two categories are apparently not suffering from heavy overcapacity.

    Personal consumption in China has been growing around 10 percent per year for more than a decade, the highest rate in the world by far, multiple times faster than developed countries and twice the rate of other middle-income economies. Growth in personal consumption rates are likely to decline as economic growth moderates.

  7. flora

    Great post. Thanks for taking apart the NYTimes story. Reporting?
    “Second, and more important, there’s no mention of the idea of debt restructuring, of the bank taking half a loaf and moving on.”

  8. thom

    Another excellent deconstruction takedown of a specific story representing the habitual lying by the new york times

  9. perpetualWAR

    Yves…….and your analysis:
    I get EXTREMELY tired of everyone thinking the “mortgage crisis” is over.
    It isn’t.
    There are MANY of us homeowners still fighting the banks and many still losing their homes.
    We are the forgotten.

    1. Yves Smith Post author

      I hate to tell you, but foreclosures are no longer at a level where they can be considered to be a crisis. That does not make them any less a tragedy.

      In 2014, they were back to nearly 2006 levels, which admittedly were somewhat elevated:

      What has happened is bank repossessions spiked in 3Q 2015, and it looks like they were concentrated in a judicial foreclosure states where the banks got procedures approved to let them complete more foreclosures they had started earlier:

      1. perpetualWAR

        Numbers…and statistics.

        There are many of us foreclosure defenders out here continuing to fight……
        We believe we are the modern day minutemen, but it appears even you are marginalizing us. I thought you could do better.

  10. pdxjoan

    There is something else missing from this article. Global climate change. Our problems are much bigger than debt overhang thanks to decades of ignoring the science of climate change. What would happen to the climate if there is a global debt write-down that unleashes enormous growth in resource extraction and burning of fossil fuels thanks to a resurgence in consumer spending and construction? This is quite a scary corner that we humans have backed ourselves in to. Our solutions can’t be limited to what has worked in the past.

  11. perpetualWAR

    Tried twice to respond to Yves reply. It appears you have shut down my ability to respond?

    The homeowners out here who continue to fight are the modern day minutemen and apparently, even you, are marginalizing us and our fight. I thought you would do better.

  12. sd

    Iceland is not as healthy as it is thought to be. Their economy has essentially recovered on the back of tourism which has brought money into the country. Wealthy young Chinese tourists are spending a fortune, shopping, eating, etc.

    And then there is Icelands indexed loan system, which makes it almost impossible to ever pay off the mortgage short of by selling the property. Borrowers are given a choice of paying two or three times total purchase price.

    They do not have a credit system for determining borrowers. Rather, they rely on co-signers. Debt is typically rolled over with the use of skutlabref or second loans that pay off the first loan. These second loans may be held by the co-signers who are on the hook for the first loan.

    There is a collection agency , TCM thatis aggressive on collecting debts. If paymentis one day late, the debt immediately goes to collection, is assessed heavy fines and fees, requiring the second loan to get it out of collection .

    Perhaps most disturbing in terms of Icelands economy, construction is at 2005 levels which was the peak reached before the 2008 collapse.

    1. Yves Smith Post author

      I have to tell you, your statement “the economy has essentially recovered” is still astonishing given how big the bubble was and the fact that the central bank collapsed.

      1. sd

        The bubble is back. Everyone is talking about it. It’s openly discussed in the news, by politicians, around the dinner table, etc. The big question everyone asks is what happens when the tourists stop coming?

  13. kevinearick

    Artificial Intelligence: Die Off & Die

    Peer group habits cannot be altered in real time;

    Like all the self-serving data provided, the census data is a lie, The Big Lie of our times (leave it to the RE banks to collect in both directions until the wheels come off);

    10k+ people are retiring per day in the US alone, which means that over 10k will die each day shortly;

    Most women currently have neither the interest nor the necessary fortitude to raise productive children as an occupation;

    AI is the eye of the needle through which DNA must pass. The dc computer filter was just the first pass (preamp inter neurons), paying people in debt to watch machines work. All those people, their consumer multiples and the dc programmers themselves are redundant;

    The Millenials are sitting this one out, meaning that there will be no interpretive generation for the previous generations to rely upon;

    The majority would rather engage in mythological culture wars at the gate than learn anything about AI;

    Legacy capital is already betting like there is no tomorrow;

    The I-phone, a selfie with bitcoins, has isolated individuals from their own reality;

    The global population is going over the falls now, with another die-off to follow, two impulses;

    Labor is built for these events; the middle class is not;

    Supply and demand are falling, and natural resources per capita are rising, but the majority has filtered itself out of that reality playing the artificial scarcity game, with infrastructure rapidly growing pollution per capita and placing artificial masses of gravity along the coasts, with no abatement;

    Draw the Bell Curve, for adaptation. Draw two small bell curves overlapping each end and X-out the middle. That is called speciation, and it is the most probable outcome on the current trajectory. Willful ignorance may be better, but adaptation is best;

    War is misdirection for financial failure, which is misdirection for demographic failure, which is misdirection for growing ignorance in the devolutionary leg of evolution, and the majority is moving in exactly the wrong direction. There are many scenarios in which the middle class dies off, all growing in probability, and a few, but shrinking scenarios through which it may pass, while it increasingly watches machines work and spends its time describing what it sees, which isn’t much;

    Life will not yield to human stupidity. How big the impulses are is anyone’s guess, but nature currently suggests two orders of magnitude +/- ½. AI will have many effects on the price of oil, not the least of which is the physics of spatial recognition and perception, all unknown to the market makers and regulators, eliminating price discovery down the line, and $30, like $45 previously, is a self-fulfilling prophesy, until it isn’t (unicorn thinking);

    Do you remember that scene in Titanic where the musicians decide to play on? That’s the banks;

    Monetary policy is not tied to the Millennial service sector, the tail waging the dog, by accident. Technical revolutions are largely noise, and replacing the human brain with a DC computer operated by a social engineer, who cannot alter the underlying proprietary algorithm without going through the IS extortion racket again, resulted in devolution. Who’d-a-thunk;

    Instead of living, the social scientists were busy paying themselves like the feudalists, in other people’s money, to study their own misperception of life, and the majority, with the resulting price misdirection, followed them right into the drug hut, with the good doctors playing every possible angle on the condensing crystal. Their technology isn’t going to save anyone because they are all locked into their own noise, and cannot accept any input which they are not expecting. And the Internet certainly hasn’t reduced the number of smart-asses on this planet;

    You have a conscious, unconscious and subconscious, which has gears in an Archimedes Screw, linear and frequency. Why would you peg your currency to someone else’s energy, dreams and illusions?

    The ac multiplexer is between the double-sided mirror, between the preamp and the amp. The work has already been done; labor is already working on what’s next. Somebody(s) just has to install the exoskeleton and make the dress, if they choose to do so.

    No Virginia, banks do not drive growth; they extract efficiencies from dying economies. When it comes to growth, they may as well be throwing darts blindfolded. “It is perfectly true that she obsessed me in spite of the fact that she died when I was thirteen, until I was forty-four.”

  14. MyWag

    Great analysis.
    Sadly, we are in very difficult territory for the long haul.

    The Great Recession didn’t convince enough ‘regular folks’ of the problem. We have been blinded by both sides…..obstructionism and false arguments from the Right; and sadly, no successful push back from the Left, only Elizabeth Warren and Bernie Sanders.

    Just how bad will things have to get before voters understand their own ‘best interests’ and Wall St don’t align. Not only don’t they align but they are diametrically opposed now that Wall St is Financialized and the New York Times’ Peter Eavis is giving us the prescription for health.

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