Debt Forgiveness In History

In the face of large-scale economic shocks, enforcing debt contracts places an unbearable burden on debtors, who cut back their spending and send the entire economy into deep recession. One of the main arguments we make in our new book is that debt forgiveness makes a lot of sense when the economy experiences a large-scale negative shock that is beyond the control of any one individual.

History seems to understand this lesson well. The 48th provision of the Code of Hammurabi, written more than 3,500 years ago in Mesopotamia, states that: “If any one owe a debt for a loan, and a storm prostrates the grain, or the harvest fail, or the grain does not growth for lack of water, in that year he need not give his creditor any grain, he washes his debt-tablet in water and pays no rent for this year.” The main threat to economic activity in ancient Mesopotamia was a drought, and one of the first legal codes understood that debt should be forgiven if such a negative shock occurred.

In 1819 when agricultural prices in the United States plummeted leaving farmers overly indebted and unable to pay their mortgages, politicians ran to their defense. Many state governments immediately imposed moratoria on debt payments and foreclosures. Senator Ninian Edwards of Illinois pushed through national legislation to forgive farmers’ debt, arguing that the country should have sympathy for the farmers who, like the rest of the country, got caught up in the short-lived “artificial and fictitious prosperity.”

During the Great Depression, President Roosevelt nixed Gold Clauses in debt contracts which led to an immediate and sizable forgiveness in debt. Research suggests this policy helped both debtors and creditors. The government-funded Home Ownership Loan Corporation established in the 1930s also helped ease debt burdens and reduce foreclosures by lowering interest payments.

During the Great Recession, policy-makers followed a very different strategy. Underwater homeowners were left drowning, with no meaningful assistance. It is a striking contrast, one that everyone should contemplate. What was different this time? Almost every reason for lack of action was likely present in the previous episodes.

We aren’t alone in noticing the historical discrepancy. Here is Brad DeLong, a top economic historian, in his review of our book:

All I can say is that I thought that this was the system that we had. I thought–from the Great Depression era history of the HOLC and the RFC, from the 1980s history of the Latin American debt crisis, from the 1990s history of the RTC, from innumerable emerging-market crises, et cetera, that we understood very well that this is what we should do. Whenever the financial system got sufficiently wedged we resolved it–we turned debt into equity, and we crammed losses down onto debt holders whose investments were ex post judged to have been ex ante unwise.

And from my standpoint the true puzzle is why Bernanke, Geithner, and Obama were so uninterested in pulling out the Walter Bagehot-Hyman Minsky-Charlie Kindleberger playbook and following it in housing finance from 2009-2014. Did they read no history?

The architects of the crisis response typically cite history as motivation for aggressive bank bailouts. But on the problem of excessive household debt, it appears that much history was forgotten.

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37 Responses to Debt Forgiveness In History

  1. jim millstein on May 18, 2014 at 8:53 ami

    The answer to Brad’s question is straightforward: policymakers were more focused on household debt as an asset of the financial system than as a constraint on household demand. If the proximate cause of the financial crisis was the collapse in home values, the firefighters were focused first on the leverage in the financial system that was had been so precariously balanced on those values.

    Had we turned 2008 or 2009 into a Jubilee Year for the household sector (forcing write downs of $400 billion of underwater HELOCs and potentially as much as $1 trillion of underwater first lien residential debt), we would have surely also have had to add significantly more capital into the financial sector than the $750 billion TARP had authority to spend.

    So, the policy focus became a less expensive “extend and pretend” set of programs: a HAMP program focused on mods and a HARP program to allow high LTV loans to be refinanced, in each case, so as to make underwater mortgages more affordable and thereby allow whomever “owned” the mortgage (whether in portfolio or in PLS or GSE MBS form) not to have to take a write-down (or as much of a write down). It may not have been as effective in re-stimulating household demand as an across the board principal write down would have been, but it softened the blow to the household sector and avoided undermining the already precarious capital position of the banking sector.

    And while this doesn’t justify the choices made, the politics of giving relief to some of the 80 million home owners who levered up and bought at the top while not giving it to the vast majority who did not was politically toxic. Indeed, it was the whisper of a rumor that the Administration was considering principal relief that gave birth to the now infamous CNBC rant from which the Tea Party movement emerged. Unfortunately, the path of least resistance was to “extend and pretend” rather than to further provoke the “moral hazard” chorus in the cheap seats.

    • Max on May 19, 2014 at 11:24 ami

      Why would relief necessarily have been given only to some? A blanket cash infusion to citizens, minus any debts, would have been fair and popular with the voters, if not with the banks

      • Juana Molina on May 19, 2014 at 2:01 pmi

        Right. The government can’t favor home-debtors over renters given that it taxes both. If it wanted to help with debt burdens, a flat income transfer that disregards debt levels would have been the way to go.

        The last thing the country needs is more incentives to load on debt to buy the most inflated asset. In fact, those who stayed on the sidelines during the bubble and didn’t participate in the craziness (RENTERS) deserve a much bigger transfer, not a smaller one. That “encouragement for doing the right thing” payment would have been spent making up for the consumption retreat of those who recklessly HELOCed their equity to spend it.

      • The Arthurian on May 21, 2014 at 8:55 pmi

        “A blanket cash infusion to citizens, minus any debts, would have been fair and popular with the voters, if not with the banks”

        The banks would have made money by it, don’t worry about that, Max.

        A blanket cash infusion might have been popular and might have been fair, but would not have been supported by economic theory. A cash infusion that reduces debt *can* be justified by theory.

  2. Frank Hudson on May 18, 2014 at 9:44 ami

    I understand and agree with the notions of historical debt forgiveness. However I do have a couple questions concerning debt now as opposed to debt in the past.

    My first question is how do we properly convert debt into equity so that it doesn’t effect the financial markets? It seems more and more emphasis is being put into growth from projected payments and interest from debt issuers. So simply forgiving debt doesn’t seem like it would be easy nowadays with so much more riding on it.

    Also I’d ask that if we simply provide debt forgiveness, wouldn’t that create more incentive for people to become greater risk takers?

    My second question is about when we burden the losses on the people that made unwise decisions. First is this fair with the recent rumors revolving around rating agencies not properly adjusting their ratings on investments? Secondly it seems more and more people are being involved with holding junk bonds and bad investments, especially with the rise of HFT. So how would we properly assign these debt burdens?

    And finally, if the majority of people are dependent on debt, and/or involved in high risk trading, the only way the government would be able to stay afloat and not increase taxpayer burden is by what it is currently doing with QE correct?

    Any additional information would be greatly appreciated.

    Thank you for your time.

    • BananaGuard on May 19, 2014 at 7:19 ami

      There is risk-taking on both sides of a loan. By not cramming down bad debt, we have encouraged risk-taking by lenders. In fact, when you mention there being “so much riding” on accumulated debt, you are putting your finger on the problem. The financial industry was willing to run debt ratios up to extraordinary levels because of confidence that the risk was held elsewhere. Mortgages involve collateral. Credit default swaps were available (more than just available) and faith in the “Greenspan put” was widespread.

      In the case of mortgages, the lending industry had more or less left underwriting to the borrower – if you are willing to put your dwelling on the line, we’ll lend you money, no real questions asked.

      You can structure a mortgage market around leaving it up to borrowers whether they will borrow. It would look very different from the one we have, and be highly punitive toward borrowers. You can structure a mortgage market around underwriting as we thought we knew it. What you should never do is pretend that lenders are undertaking conventional due diligence measures when they aren’t. Leaving lenders close to whole because of the risk their ruin represents means we allowed them to pile up too much leverage and take too little responsibility.

  3. Jay on May 18, 2014 at 12:48 pmi

    As someone who will become a homeowner in the not too distant future, I don’t want to pay a higher mortgage rate because the market has to price in the probability that the government steps in and breaks my contractual obligation. I’m already going to have to pay higher interest because of prepayment risk faced by the lender.

    • BananaGuard on May 19, 2014 at 7:26 ami

      The argument you present is the one lawmakers are tempted to accept, but is bad policy. “Policy that serves narrow interests is often bad policy.

      Policy should aim at minimizing systemic risk and preventing market failure. If refusal to break private contracts does heavy damage to those who were not party to the contract, there is a market failure and policy makers should step in. There was a market failure behind the “Great Recession” and the effects are still being felt now.

  4. tew on May 18, 2014 at 3:21 pmi

    OK, let’s take some choice law from ancient societies. They’ve got plenty about slaves and daughters and wives too.

    And the code cited would be covered by insurance today.

    And the ancients did not face a debt incurred from reckless speculation. The unpayable debts were solely the result of circumstances beyond the debtor’s control. The unpayable debt was a burden upon producers who sought to provide essential goods for society.

    The modern situation is quite different. Many people and institutions with large debts were speculating or they used the proceeds from the debt for personal (selfish) consumption and enjoyment.

    So a blanket jubilee is deeply immoral and may have negative follow-on consequences since it is sure to corrode social harmony and diminish incentives to work.

    Helicopter money, provided to all taxpayers, would relieve debt loads but would be subject to much less moral hazard. Every taxpayer would apply for a fixed amount of free money. If the taxpayer has debts then the money would go to pay those debts. If the taxpayer’s debts are less than the fixed amount then the taxpayer gets the proceeds.

    For example, everyone would get $10,000. Times ~200MM people that would be $2T.

    Note that the funds could be provided over years with those in debt getting up to the maximum immediately if it went to paying off debt.

    • Dan on May 19, 2014 at 6:41 ami

      respectfully TEW, while a blanket jubilee may or may not be deeply immoral, it is a strawman and has not been proposed.
      Secondly, what happened was that banks were treated differently than homeowners, do your really think the policy chosen was deeply moral?
      And thirdly and most importantly, morals need have nothing to do with it. the point is to chart the most successful economic course. The argument is, and I find it deeply persuasive, that reducing debt to avoid the fisher debt deflation trap is good economics.

      • tew on May 19, 2014 at 4:33 pmi

        Until we turn into robots, morality does matter in political decisions.

        The decision is not purely one of economics, thought economics should guide us.

        If you’re going to have a jubilee then at least it should be confined to the debtor and creditor, not society in general. If you force the cramdown, force it down the throat of the creditor instead of taking money from ordinary citizens (via a variety of avenues). Let the creditor go bankrupt.

        This is why I was opposed to the extraordinary measures provided to financial institutions – it was a one-sided deal that created value for them at the expense of taxpayers. And it’s a similar reason to oppose jubilee.

    • BananaGuard on May 19, 2014 at 7:40 ami

      The insurance market failed in the latest case, which had to do with homes, not crops, so your point about insurance fails as well.

      You assert that “the ancients” didn’t engage in speculation. Got evidence of that? Speculation seems pretty much part of the human conditions. Do we have sufficient records of financial events in Hammurabis time to know whether there was speculative lending? Ancient Athens (377 BC or so) suffered a bout of real estate speculation that resulted in a banking collapse, so certainly some of the “ancients” engaged in speculative lending and investment.

      But this is the best bit (which is to say, the worst): “So a blanket jubilee is deeply immoral and may have negative follow-on consequences since it is sure to corrode social harmony and diminish incentives to work.”

      Your “So” suggests you have made a demonstration of the point you offer. Even if the things you claimed on the way to “So” held up, they would not constitute a reasoned argument about the morality of a debt jubilee. The “social harmony” and “incentives to work” are utterly gratuitous. You’ve offered no support for them and for good reason. They are insupportable, simple statements of belief.

      Made-up facts that don’t even support the made-up conclusion you aim at don’t constitute any sort of argument at all.

    • MJ on May 21, 2014 at 1:09 pmi

      From where do you acquire ‘morality?’ If the answer is the bible and you are Jewish or Christian, than the Jubilee year is enshrined as biblical moral requirement. I would also note that the Jubilee Year happens at the end of 7 sabbatical years, and does not just cancel debt, but redestributes all land back to its historical family ownership (radical redistribution). Debts, biblical speaking, were meant to be cancelled every sabbatical year, every seventh year. Now if you, like me, define your morality by religion then you should reconsider your position on sabbatical years, debt forgiveness, and jubilee years. Human productivity may not work exactly as you currently expect.

  5. William Hurley on May 18, 2014 at 6:18 pmi

    The advice you offer is more than sound, it’s necessary. Of course, you’re also right – as have been many – that such “relief” is at once long overdue and had once been a simply and significant policy vehicle to reinvigorate sagging demand.

    Unfortunately, the arena within which policy – all policy – is considered has demonstrated a frightening preference for the bad, unworkable, ahistorical, incoherent and/or moralistically punitive when weighing alternatives. The circumstance has become so cartoonish that maxims once thought tried and true no longer function. The example I have in mind is the “good cop/bad cop” pantomime that pre-convinced policy-makers rehearse before delivering the policy actions that comport most closely with their presumptions. As such, we’re left with few sober voices trying shout over the cacophony of the clownish bad cops.

    One last note, it seems to me that any and all debt/deficit scolding should be directed to the org charts of lenders – large & small. On those charts they’ll see that in almost all cases, the point of contact between a financial institution (lender) and the general public is the terrain of sales people incentivized to move product – always in the absence of second considerations.

  6. Brad Kitson on May 19, 2014 at 4:25 ami

    What truly confounds me is why we didn’t allow everyone to re-finance to the historic low interest rates. Any borrower would have immediately been a better risk to pay their mortgage.

    • richard on May 19, 2014 at 2:50 pmi

      indeed! i’ve tried to refinance with my mortgage holder and been told my equity was now too low and thus the risk too high. wouldn’t the riskiness of the mortgage be lowered if i was able to refinance at the same rates the banks are getting their money for, and thus benefit everyone?

      perhaps a government bank that permitted each individual a single refinancing of their primary residence at the low bank rate would be fair to those of us who have been caught in the home price down-draft through no fault of our own. i know it’d help me with this house i can’t afford to sell and can’t afford to keep!

      • Doug on May 21, 2014 at 7:46 ami

        Indeed, I am in the same situation – with the value of my house in the Chicago suburbs 2/3 of what it was when I purchased it – how could I refinance? Fortunately, I finally received some relief with from an obscure government program for VA loan holders – which allowed me to refinance without an appraisal. So at least I am now paying only 3% on my loan for a house that I can’t afford to sell or keep!

  7. dax on May 19, 2014 at 6:26 ami

    Let’s look at debt-forgiveness for student loans for example. Many are in over their heads. Yet, if you forgive, what do you say to those who didn’t go into debt, lived with their parents, went to a less expensive college? Sorry chump? Debt forgiveness is deeply immoral, and it says much about how badly American economists have been trained when they think debt forgiveness is some kind of brainstorm.

    • Juana Molina on May 19, 2014 at 2:10 pmi

      “Debt forgiveness is deeply immoral, and it says much about how badly American economists have been trained when they think debt forgiveness is some kind of brainstorm.”

      Agree. Truly short-sighted to say the least. Thankfully it will never fly in a democracy, as the reckless are not the majority.

      The flat income transfer regardless of debt levels is clearly superior as it doesn’t distort incentives during the next cycle. Part of the public policy goal is to make sure that the reckless (those who buy a house regardless of debt to income levels, price to rent ratios and the like but just on the assumption that prices rise forever) have to be kept at a clear minority to avoid the mother of all crashes the next time around.

      Something that’s not discussed at all is how detrimental the people who bought homes for speculation purposes (those who bought on the believe that the price will keep on going up) imposed on the rest of society. They further inflated home prices and rents with their speculation. The last thing public policy should do is to condone this behavior.

    • tew on May 19, 2014 at 4:39 pmi

      Dax,

      They simply deny the issue and say things like “economics is not a morality play”. They pretend morals are not embedded into our economics.

      Now I do agree that one can do economics with a very reduced set of moral assumptions. However, when one wants to apply economics one must consider that the human beings involved are not simply robot “agents” with no interest beyond some macro optimization.

      Many who tout the latest research into economic inequality claim that it could be better to have somewhat lower economic growth if it reduces inequality. Those same people then say that morality should not come into play with jubilee if it adds a few bps to economic output. So inequality *feels* bad and so it turns out many people would be *happier* in a more equal society even if they themselves had a bit less. Yet, these same people are supposed to feel good if GDP grows a bit faster while they see spendthrifts put their debts onto the prudent. OK then…

    • Tygerrr on May 21, 2014 at 10:03 ami

      It is amazing to me how ignorant so many are of our cultural history, having bought into a complete inversion of the values upon which the American ethos was built.

      Take lending for instance: “In Old English law [the basis for our legal system], the taking of any compensation whatsoever was termed usury. With the expansion of trade in the 13th century, the demand for credit increased, necessitating a modification in the definition of the term. In 1545 England fixed a legal maximum interest, a practice later followed by other Western nations.” http://www.merriam-webster.com/dictionary/usury

      The Church barred Christians from any lending whatsoever while forcing that grave sin onto Jewry, which was periodically exiled or murdered in a grotesque form of Jubilee at the whims of debtor kings, nobles and churchmen. Orthodox Islam still observes the ban on lending.

      But now we’re supposed to listen to usurers who charge up to 500% interest on payday loans (Chase Bank funds several firms), tried to get me to sign a blank mortgage application, raised borrowers’ interest rates at the closing table, offered totally unreasonable loan-to-income ratios, captured appraisers to inflate home values, and sold derivative mortgage-backed securities on loans that hadn’t even been closed yet when they tell us, “Debt forgiveness is deeply immoral”?

      Financial reform requires only one short piece of law – whatever the amount needed to prevent institutional or systemic collapse, such amount will be multiplied by 1.5, then divided by the number of valid Social Security numbers and distributed in equal checks to every SSN possessor within 7 days of discovery of the financial emergency.

    • MJ on May 21, 2014 at 1:20 pmi

      Where do you define morality?
      If you hold a religious leaning from Christianity or Judaism, Debt Forgiveness occurs every 7th year. It is immoral not to forgive debts.
      Redistribution from those who can afford it to those who can’t is viewed as a righteous and moral action. While I admittedly know less about Islam, what I can find online suggests that extending or modifying a loan to one in hardship is righteous, as is giving ‘sadaqah’ and forgiving a loan to one in need. All three pillars of Western and Near-Eastern morality seem to be in agreement that low forgiveness is or can be a righteous act.

      That we force people to go into a lifetime of debt to attend college’s with historical rough career prospects perhaps should be reconsidered. Is it moral that someone 30 years ago could attend college for a significantly statistically higher standard of living and disposable income than someone could today, even holding constant that both individuals studied something practical? Is it moral that today’s students must deal with Universities that are not as politically supported or funded as the Universities of parents generations and are forced to go into years of debt?

      Perhaps a different perspective would result in different questions. I will agree with the sentiment that morality should govern economics; I disagree on the narrow perspective of what is and isn’t moral.

  8. kdez on May 19, 2014 at 7:02 ami

    The Code of Hammurabai deals with debt forgiveness in the face of drought, a natural disaster afflicting the entire population – very different from a bunch of greed heads destroying the economy while enriching themselves beyond the dreams of avarice.
    Hammurabai would have had Jamie Dimon thrown to the lions. Not sure what he would decree about the debts….

  9. Art on May 19, 2014 at 7:25 ami

    Are lenders and borrowers equal parties to a loan? Do both have an obligation to conduct diligence to understand the risks surrounding the transaction?

    If minimizing future moral hazard dictates that a borrower should be stuck with the consequences of an unwise loan, why should a lender not also be stuck with consequences?

    Why is it so easy – almost natural – for observers (including commentors here) to frame moral hazard as something that only afflicts borrowers? What about lenders that are generally more sophisticated, better politically-organized, and possessing more resources than individual homeowner/borrowers? Giving them a free pass gives them every incentive in the future to make more risky loans.

  10. Davor on May 19, 2014 at 7:59 ami

    Problem with “moral hazard” is that everybody who talks like that considers morally unacceptable that individuals who took too much credit should get relief, but nobody talks about the institutions that enabled that. Start with the premise that financial institutions have to know what they are doing, and that individuals, specially less educated ones, usually know much less. If institutions were willing to lend money to people who obviously couldn’t pay it back, they deserve to lose it more than those individuals deserve to lose everything. And anyone who treated such mortgages as AAA grade capital deserves to lose everything too. Then someone would, hopefully, sue rating agencies who rated grade C stuff as grade AAA for damages, and rating agencies would start actually doing their job.
    Moral responsibility should be assigned firstly to those with the most information, not those with least, as is done now.

    • dax on May 20, 2014 at 6:34 ami

      Well obviously lenders who made bad or shady loans should suffer up to what the law says *currently*. What is wrong is to change the law – change the rules – to advantage one party (mind you, either party, and this is why the bank bailouts were also deeply immoral). If you want to institute a jubilee put it into law now for future loans, but don’t backdate it.

      • Davor on May 21, 2014 at 1:08 ami

        But, laws are set so that the party with better access to the information and better knowledge is more protected. And then bailed out.
        All the loud arguments against the debt forgiveness take as given that this is free and equal market, where everyone has the same chance and, consequently, bears the some responsibility. That is not true. In most fields, especially finance, market is skewed towards the rich and big – better access to the information, more knowledge. So, private individuals without extensive education in this field should have more government protection, to make things equal. That means that any bailout should have gone more towards the borrowers than towards the lenders.
        Now, the problem is that any debt forgiveness punishes in a way those who were reasonable enough to stay away from excess debt, that is true. But:
        1) Many of the people in trouble are there not because of their greed, but because of the bad circumstances; they made sound business decisions and took reasonable debt, but when market crashed, it destroyed them;
        2) Currently, instead of bailing out those who borrowed foolishly, taxpayers money, is used to fatten bonuses of those who lent foolishly; if they knew they can lose everything, they would be more careful next time, and next crisis won’t be so deep;
        3) Debt forgiveness shouldn’t mean strike all debt – you’re clean, it should mean that those who realistically can’t pay back their loans have to pay some part, that still hurts, but allows them to live and recover.

      • Nathanael on May 21, 2014 at 12:25 pmi

        Bankers are being allowed to get away with *literally forging documents* in order to steal people’s homes. Look up “foreclosure fraud”.

        The financial statements of the major banks are also completely fictitious, full of fraud, but they’ve been allowed to get away with it.

        So, in fact, the bankers have allowed to completely ignore current law.

        If they were forced to obey current law, a lot of the debts would be automatically forgiven. The bankers *shredded the original mortgage documents* — which legally forgives the loans.

  11. John Tredway on May 19, 2014 at 8:52 ami

    I assume in your book and I intend to read it soon that you have a solution to debt forgiveness in the housing market citing two main reasons for the bubble:

    1. the excessive amounts of house flipping going on in places where the housing shocks were most severe; places like FL, CA, AZ. If you have researched the situation in Florida as an example, the flippers, bankers even the appraisers were in the same game to get rich quick. Investigative reporting on this is pretty clear that flippers were driving the market. Should they be given debt forgiveness?
    2. Next, turn to the homeowner who got a 750,000 mortgage but could only afford $200k. Should this person be part of the bailout of people deserving mortgage forgiveness? Sure, they listened to a banker tell them, “It will be no problem on an ever rising housing market” but doesn’t the borrower bear some of the responsibility.
    3. Borrowing on equity like it was an ATM. Do you remember that as the cash machine leading to more underwater mortgages after the housing collapse?

  12. Stephen Roach on May 19, 2014 at 8:56 ami

    Your blog/ research/ book are outstanding. How do I get on your distribution list?

  13. Up the Down Escalator on May 19, 2014 at 10:21 ami

    I agree with this completely. Thank you for making this point.

  14. Juana Molina on May 19, 2014 at 2:14 pmi

    If your world view is that the system has to protect those who can’t understand when they are taking too much debt for their own good, then the argument should be in favor of a highly-regulated mortgage market with much higher down-payments.

    Going back to 20% down-payments is the best way to protect debtors from being underwater. The issue is that there’s the confusion that high home prices is a good in itself and that a 20% down-payment will bring home prices down.

    That’s the real issue to discuss. Whether the current gov policy that favors high home prices isn’t exacerbating the crash. If so, then that’s the policy to get rid of. Getting rid of the mortgage interest deduction is a good start.

    • BananaGuard on May 20, 2014 at 7:44 ami

      Juana, both of your comments seem to insist that all the responsibility for assessing credit-worthiness falls on the borrower. If the borrower defaults for reasons within the borrower’s control, the lender made a bad loan. In a market system, the lender should end up dealing with the consequences of the bad lending decision.

      The reason for government intervention is that the banking system imposes huge risks on the rest of us. That sort of externality is exactly what calls for regulation. So yes, there should be more regulation of lenders. Your comment seems to imply regulation is not the right approach. If government intervenes to save banks, then taxpayers have a direct stake in good underwriting and in bank leverage, and there should be regulation. Why the focus on borrowers?

  15. john toner on May 19, 2014 at 6:29 pmi

    What-are-ya-frickin’-nuts?

    There IS “debt forgiveness” for under-water home owners. 1) Bankruptcy OR 2) Short Sale.

    Oh – you want borrowers to have debt “forgiven” AND get to KEEP the asset they borrowed for? That would be, in a word, immoral, and the results, disastrous. You would

    1) Increase future borrowing costs for all borrowers (lenders would have to factor in future, unpredictable losses); AND

    2) Encourage reckless borrowing.

    Freedom of speech protects your right to declare your opinion; and protects my right to call you an idiot.

    • BananaGuard on May 20, 2014 at 7:54 ami

      What, are you friggin’ ignorant?

      Bankruptcy is not universally available to those who can’t make mortgage payments. A mortgage is a collateralized loan. If surrendering the house is sufficient to keep the debtor solvent, bankruptcy is generally not available. Short sale requires the cooperation of the bank, so short sale is no universally available.

      What is moral is not whatever you decide is moral. That’s just silly and childishly egocentric.

      Setting borrowing costs to reflect the risk of loss is standard lending practice. I realize it has become a feature of the echo-chamber to repeat in horror the point about borrowing costs reflecting risk, but that simply textbook lending stuff. Anybody who doesn’t know that doesn’t know enough to be offering opinions about lending.

      Encouraging reckless lending is certainly as bad as encouraging reckless borrowing – actually worse, as a matter of cost minimization and information asymmetry. Your focus on reckless borrowing is evidence of the weakness of your view.

      Freedom of speech is a protection against government censorship, not a protection of speech from any other inhibition. It’s no surprise that you made a mess of this point because you seem not to know very much about, well, let’s limit it for now to all the issues you’ve addressed here.

    • Nathanael on May 21, 2014 at 12:26 pmi

      Look up the 2005 Bankruptcy Law before you write, you dolt. That changed the rules so that human borrowers CANNOT get bankruptcy easily.

      Big corporations, of course, can still get bankruptcy easily.

  16. ReturnFreeRisk on May 22, 2014 at 9:12 ami

    Paul Volcker might have been sec of treas. He had another RTC plan ready. He was going to call it RTC too. Obama picked Geithner instead and Summers. The whole plan got torpedoed. I knew on Nov 19th 2008 that we were going down the wrong path.