William Greider: It's Time for Debt Forgiveness, American-Style

[marmar]

from The Nation:



It's Time for Debt Forgiveness, American-Style

William Greider
October 26, 2011


The rebellious citizens occupying Wall Street shock some people and inspire others with their denunciations of bankers, but everyone seems to know what they are talking about: it is the barbaric and suffocating behavior of the nation’s largest banks (yes, the same ones the government rescued with public money). Right now, these trillion-dollar institutions are methodically harvesting the last possible pound of flesh from millions of homeowners before kicking these failing debtors out of their homes (the story known as the “foreclosure crisis”). This is a tragedy, of course, for the people who are dispossessed. For the country, it is a generational calamity.

“We are in the reverse New Deal,” Christopher Whalen, a savvy banking expert at Institutional Risk Analytics, told me. He meant that events are dismantling the ingenious engine that helped generate America’s broad middle class. Homeownership was the main driver in accomplishing that great social change. For three generations, people of modest means could buy a house knowing it would secure their place in the middle class and allow them to accumulate significant savings. If the family held the standard thirty-year, fixed-rate mortgage, they were painlessly saving for the future every time they made a payment, acquiring greater equity in the home as they did so. With moderate inflation, the house would steadily increase in value even as their monthly mortgage payments stayed the same. So the cost of housing actually declined for the family, as a percentage of its income. Meanwhile, the accumulating equity became a nest egg for retirement or something to pass on to the kids.

That virtuous process, originated by New Deal reforms, is in peril and has already shut down for tens of millions, especially working-class families whose incomes are no longer rising. As described by the brokerage investment firm Amherst Securities, the housing picture is ugly. Among the 55 million families with mortgages, one in five is underwater—they owe more on their mortgage than their house is worth—or already delinquent. That’s 10.4 million families who are sliding toward failure and foreclosure. Virtually all of them will become renters, since no bank is likely to give them a new mortgage.

As a result, the housing market will remain depressed for years—too many houses for sale, too few buyers. Amherst estimates excess supply of 4–6 million in the next six years. Economic recovery may have to wait until that surplus is gone, because the housing sector has always led the way out of recession. The more housing supply exceeds demand, the more prices fall. The more prices fall, the more families get sucked into the deep muddy. The vicious cycle is known in the industry as the death spiral. So far, there’s no end in sight. ............(more)

The complete piece is at: http://www.thenation.com/article/164216/its-time-debt-forgiveness-american-style

[CanonRay]

1. "Events" aren't dimantling the New Deal, the rich and Republicans are doing it.

Systematically and with an overall plan lasting decades.

[xchrom]

2. recommend

[leveymg]

3. This is part of the global restructuring of America into a medium-wage destination for

multinationals. Knocking the (admittedly) overinflated cost of housing down is viewed as essential to "competitiveness". William Greider is an authority on globalization, and I'm surprised he doesn't explore that angle.

[enough]

4. "Forgiving the debtors is the right thing to do, because the bankers have already been forgiven."

From the article:

snip>

There is a solution, and it will appeal to the rebellious spirits occupying Wall Street because it combines a sense of social justice with old-fashioned common sense. It is forgiveness—forgive the debtors. Write down the principal they owe on their mortgage to match the current market value of their home, so they will no longer be underwater. Refinance the loan with a reduced interest rate, so the monthly payment is at a level that the struggling homeowner can handle. This keeps families in their homes, with a renewed stake in the future. It gives homeowners incentive to keep up their payments, because once again they have some equity and the opportunity to accumulate much more.

snip>

Forgiving the debtors is the right thing to do, because the bankers have already been forgiven. The largest banks were in effect relieved of any guilt—for their crimes of systemic fraud or for causing the financial breakdown—when the government bailed them out, no questions asked. The Obama administration followed up with a very forgiving regulatory policy that basically looked the other way and ignored the fictional claims on bank balance sheets. Instead of forcing honest accounting and rigorous reform, the administration adopted a strategy of soft-hearted regulation that banking insiders call “extend and pretend”: extend the failed loans and pretend that the loans will be paid off, even when you know many of them won’t. The phrase originated during the third world debt crisis in the 1980s, when the Federal Reserve rescued the same big banks from insolvency, the result of their reckless lending in Latin America.

This time, the government’s rationale for rescuing bankers first was that the economy cannot recover until the financial system is healed. The premise did not prove out—banks revived, at least partially, but not the economy. The same rationale applies, more logically, to failing homeowners. A heavy blanket of bad debt is smothering economic activity. Until the debt is lifted from the housing market and financial balance sheets, the economy is unlikely to regain its normal energies. So debt forgiveness is not just a moral imperative; it’s also an economic necessity.

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