Agreed - even subprime lending wasn't THAT unreasonable. If the economy didn't completely dissolve, you'd have normal default rates which are expected and accounted for with the higher interest rates. The local credit union did nothing wrong making reasonable loans to their customers, but for some reason, people think it's a brilliant idea to destroy them because they are called a bank, and therefore must be evil.
The flip side happened in 2008. Because some lenders got screwed, all of them got rewarded. Except they didn't even view capital injections as rewards. Bernanke and Paulson had to BEG some of the banks to accept the capital that would have floated them. They took non-participating shares in the banks; that was how timid they were. The whole system was set up to reward failure. Let's face it, every solution to 2008 was dumb, it was just a matter of which was the least dumb, and we would have no idea if this one was because this didn't even pop up in a lot of the discourse on the topic. Personally, I think the fact that this would have prevented somewhat the slide in real estate prices, and therefore ease conditions for good banks, and specifically punish bad banks who were originating to distribute means that if done right, this solution would have held some promise.
Inflation has a price. Paying the debts of defaulters has a price. But IMO its all worth it for the resulting correction in the behavior of the financial industry in Iceland. Iceland is turning out to be a fantastic example to watch, and we will see the results of these actions unfold in front of our eyes over the next decade or so. In reality, this is just one power class attacking another power class (politicians vs financian). But this is better than the two classes befriending each other. If Iceland were to take it one step further towards real fair treatment, they would quantify the suitability of these banks practices and offer debt forgiveness on a sliding scale: return 100% to debtors of aweful banks, 75% for bad banks, 50% for average, 25% for good banks and 0% for debtors of excellent banks. It's true that there is nothing good about paying back the debts of someone who did not manage their debt properly. However, we need to recognize all the variables such as their lenders' policies and marketing, the economic consequences (isn't the entire population of Iceland collectively TOO BIG TO FAIL for Iceland?), etc. A person defaulting on a loan does not necessarily mean they mismanaged their debt - if you haven't learned this since 2008, then you will never learn it. Businesses seek profit. Injecting cash into the most powerful and largest entities and hoping for a trickle down economic effect is not solving the root problem IMO. If I were one of those businesses, I would drink that cash and suffocate the people waiting for the trickle down. This would weaken them and strengthen me, and give me an even larger advantage over them than before. Furthermore, I would save save save money. Screw that, I'm not going to be the first one to put my toe in the pond after the crisis. Wait for those desperate small and medium sized entities to take what little they have left over to the markets and get it going again, then I'll come in and trickle all over them when there is better stability. If this is a question of putting the burden on the lender or debtor, then without a doubt, lenders must take most of the responsibility for this. The people did not act collectively, so the consequences of their collective actions can not be pinned to them individually. When I get a loan, I don't ask how that affects the economy or how many other people are getting a loan. I'm an individual. I get my loan, and I assume the only thing that can screw it up is default. I don't take systemic risk into consideration. I don't take the bank's liquidity into consideration, because I assume that if the bank is lending me money, that they are only doing so because they have it. This is what the average person does. Businesses are made to act collectively. The consequences of their actions are entirely their responsibility since they were intended to take those actions on larger scales and by leveraging off collective funds. In addition, I wonder how willing Icelandic people are going to be to participate in the rebuilding of Iceland when they see that their government took their side. You look at the US today and you see the highest level of economic sabotage imaginable during the worst of economic times. Same goes for Europe. I don't see that happening in Iceland. I see people not enslaved by unfortunate debts who have better things to do than to bicker over the scraps left over by still-rich and still-powerful people. I know that Iceland doesn't have a massive population so I wonder if this approach is reasonable for larger economies.
I am still mulling over Iceland's solution but it does make me uneasy. While I agree that we need a solution to the mortgage crisis that isn't just focused on propping up banks we still need lenders to have some confidence that they will be able to collect. The risk I see with a solution like this is that what incentive is there for foreign banks to lend to Iceland if they have no confidence that they will be paid back? Rather than helping Iceland homeowners this could end up hurting them in the long run.
1. Earn $40k in salary 2. Buy 10 houses at 3-y ARM teaser rates 3. Default on all 10 houses when rates reset 4. Have govt pay down your mortgage 5. Profit!
How did they get rewarded? They took huge amounts of losses. Their stock values got crushed, so their owners paid the price of their stupidity. They got loans which they had to pay back at credit card interest rates. The government did it at ZERO cost to them and placed all of the costs on the banks - in fact, thanks to the net profit the taxpayers made on TARP, the banks basically paid for the entire government bailout of the auto industry. I agree that they got funding that they couldn't have otherwise gotten - but that was because of a systemwide collapse. If any individual bank was facing the challenges they were facing without a global problem, they could easily have gotten money at a lower rate than they did (as demonstrated by Goldman and Warren Buffett). So they did get emergency financing, but they also paid a higher interest for it. It's not exactly much of a reward. I agree with the first part, but disagree with the second. This idea has been floated by OWS people in various forms: mortgage forgiveness, student loan forgiveness, etc. In each case, it's a horribly dumb idea. It's like using a shotgun to try to kill a fly. Does it punish who you want to punish? Sure. But the amount of collateral damage is ridiculous. If you forgive $13 trillion in mortgage loans in the US, there would be no good banks to assist. Keeping real estate prices high doesn't matter to a bank if it takes 100% loss on all of its loans and no longer owns any of that better-priced real estate. No bank is going to lend at 5% if they could randomly be forced to take a 100% loss on a perfectly healthy, properly made performing loan. There's simply no business model there that makes any sense.
How about instead of debt forgiveness, we just force-freeze all interest rates. Banks get their money and debtors aren't getting choked as badly.
Interest rates are already at record lows. I'm not sure exactly how ARM loans work, but I'd imagine the people that got those several years ago are in great shape as far as interest rates go.
The US bailed out the banks, Iceland bailed out its citizens. Don't know which will work better, but it is something different and something way outside the box. It has its moral hazards, but so did bailing out the banks.
Except the reality is that we know that erasing everyone's debts wouldn't work, because every bank in the country would disappear and cause a massive destruction of the FDIC since the banks don't have as many assets as the total value of the mortgage market. Not surprisingly, Iceland is also not this stupid, and the story posted in the original article is not remotely true. What actually happened: http://exopermaculture.com/2012/04/26/about-that-iceland-mortgage-debt-forgiveness-story/ The government and the newly constructed Icelandic banks developed a template to be used in case by case restructuring discussions between borrowers and lenders. The templates facilitated substantial debt write-downs designed to align secured debt with the supporting collateral (i.e bring the loan into line with the value of the house) and align debt service with the ability to repay. The IMF found that such case by case negotiations safeguard property rights and reduce moral hazard, but they take time. As of January of this year, only 35% of the case by case restructuring applications had been processed. To speed things up, Iceland has introduced a debt forgiveness plan which writes down deeply underwater mortgages to 110% of the households’ pledgeable assets. It noted that only when a comprehensive framework was put in place and a clear expiration date for relief measures announced that debt write-downs finally took off. As of January 2012, 15 to 20% of all Icelandic mortgages have been or are in the process of being written down. However, it said the jury is still out on Iceland’s plans, and said the extent to which Iceland can put its citizens back on their feet and minimise moral hazard remains to be seen.
Basically, Iceland's big program is what we've already had in place for a few years in the HAMP program, though apparently a little more effectively managed.
Helping a neighbor is one thing. Buying a house you can afford, and making all your payments and then rewarding the guy that didn't is an entirely different thing.
Well if that guy can't make his payment then your houses value goes down as well. So don't think of it as helping him think of it as helping yourself.
So basically you want to destroy perfectly valid contracts and screw over banks who did nothing wrong simply to benefit yourself? That's a healthy way to run a country.
I have been saying that FOR YEARS...that instead of bailing out the banks, we should have bailed out the people, and let them use that money ONLY for paying down their mortgages, the banks would still get the money, but the people would be in much better shape to spend and keep the economy going. Bailing out greedy ****ing wall street pukes, was 100% the wrong way to go, thanks W and O. DD
Agreed. unfortunately the best way to fix the problems will never happen in this country. It would have to start with the individuals all living within their means..when they do that, then they'll start demanding the government do the same. Unfortunately, it is more important to people in the US to buy a $300 game system then to put that $300 onto their debt or into savings.
Except bailing out the people would cost incredible amounts of money. Bailing out the banks cost nothing. There's a tiny little difference there.
