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Trillions in Bad Loans May Sap World Economy for a Long Time

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Re: Trillions in Bad Loans May Sap World Economy for a Long Time

#21

Post by jasode »

ihsw wrote: post #12

Why not forgive the loans? The negative affect of debt on people's capacity to contribute to the world economy is high, and I think it stands to reason that people would contribute more for the duration of paying off their loan if the loan wasn't hanging over their head. The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place. The intention is to throw people…

>Why not forgive the loans?

The idea of a "debt jubilee" is definitely something that's been discussed before by economists and philosophers.

One big issue is that there are other people on the other side of those debt cancellations that would get hurt.

For example, it's terrible that young adults have massive college loans to pay back. Some are kicking around the idea to forgive those loans. But there are also creditors as well. Think of grandparents who have a 401k for retirement. Through the interconnectedness of the financial system, a component of their retirement income will depend on payback of those "bad" college loans.

Will those senior citizens happily vote for a debt reset if they know their retirement savings get reduced? Seems doubtful.

The way to sell the idea of debt forgiveness is to convince the creditors that it's impossible for the debtors to pay them back. Therefore, take a financial hit now instead of later so the economy can get moving.

Re: Trillions in Bad Loans May Sap World Economy for a Long Time

#22

Post by phkahler »

twoodfin wrote: post #13
ihsw wrote: post #12

Why not forgive the loans? The negative affect of debt on people's capacity to contribute to the world economy is high, and I think it stands to reason that people would contribute more for the duration of paying off their loan if the loan wasn't hanging over their head. The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place. The intention is to throw people…

Imagine you're a bank calculating the interest rate to offer on a loan. Do you think that rate will be lower or higher if you believe there are circumstances wherein the government would unilaterally allow your borrower to cease payment? Obviously, if the government could be metaphysically certain of the loans that would never return another penny and only cancel those, there's no net loss to the bank. But there's no…

>> Risk of government-sanctioned default is the same as any other default risk, and will be priced into interest rates, hurting especially those with marginal credit whom the banks judge most likely to be the "beneficiaries" of some future forgiveness.

This seems to be the opposite with student loans. The government has backed those and will not allow them to be dismissed in bankruptcy and all that, yet those loans have some of the highest interest rates around.

Is that just based on the lack of collateral? I mean a person could die and then it will never be repaid. Homes are required to carry insurance, so the risk of destruction is covered. Is that what it is, or are they just screwing people over? These are just questions, I have no skin in the game ATM and hope my kids can avoid it as well.

Re: Trillions in Bad Loans May Sap World Economy for a Long Time

#23

Post by nickff »

kolbe wrote: post #15
redthrowaway wrote: post #3

Almost like the better part of a decade of free money tends to create bad debt.

On top of that, instead of getting rid of the people who issued bad debt ten and twenty years ago, and let new people into the banking system, we instead kept the same inept cleptocratic money managers in charge, but gave them more firepower.

We also left the same regulators (who did nothing to forestall the Great Recession) in place for good measure!

Re: Trillions in Bad Loans May Sap World Economy for a Long Time

#24

Post by cryoshon »

jasode wrote: post #21
ihsw wrote: post #12

Why not forgive the loans? The negative affect of debt on people's capacity to contribute to the world economy is high, and I think it stands to reason that people would contribute more for the duration of paying off their loan if the loan wasn't hanging over their head. The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place. The intention is to throw people…

>Why not forgive the loans? The idea of a "debt jubilee" is definitely something that's been discussed before by economists and philosophers. One big issue is that there are other people on the other side of those debt cancellations that would get hurt. For example, it's terrible that young adults have massive college loans to pay back. Some are kicking around the idea to forgive those loans. But there are also credi…

Cynically: the old are already impoverished, and we have more to gain by freeing the youth from future poverty than we do by salvaging twilight years.

Realistically, you're right about debt having two sides... but one side is typically far more in the hole than the other.

Re: Trillions in Bad Loans May Sap World Economy for a Long Time

#25

Post by Frondo »

jasode wrote: post #21
ihsw wrote: post #12

Why not forgive the loans? The negative affect of debt on people's capacity to contribute to the world economy is high, and I think it stands to reason that people would contribute more for the duration of paying off their loan if the loan wasn't hanging over their head. The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place. The intention is to throw people…

>Why not forgive the loans? The idea of a "debt jubilee" is definitely something that's been discussed before by economists and philosophers. One big issue is that there are other people on the other side of those debt cancellations that would get hurt. For example, it's terrible that young adults have massive college loans to pay back. Some are kicking around the idea to forgive those loans. But there are also credi…

This is a really good point. My gut tells me that if the old people were relying on the massive indebtedness of today's college attendees, then that has been a cruel error on their part, an injustice that should be righted.

Also, the artificiality of the debt--and the idea that a jubilee won't really hurt the creditors--is put into striking relief by the Rolling Jubilee. Right now, people are already buying that bad debt for pennies on the dollar, just to wipe it out. I'd like to see if anyone's modeled what would happen if that behavior were just turned up to 11, who'd be harmed, etc.

Re: Trillions in Bad Loans May Sap World Economy for a Long Time

#26

Post by jasode »

Frondo wrote: post #25
jasode wrote: post #21

Earlier quoted context omitted.

>Why not forgive the loans? The idea of a "debt jubilee" is definitely something that's been discussed before by economists and philosophers. One big issue is that there are other people on the other side of those debt cancellations that would get hurt. For example, it's terrible that young adults have massive college loans to pay back. Some are kicking around the idea to forgive those loans. But there are also credi…

This is a really good point. My gut tells me that if the old people were relying on the massive indebtedness of today's college attendees, then that has been a cruel error on their part, an injustice that should be righted. Also, the artificiality of the debt--and the idea that a jubilee won't really hurt the creditors--is put into striking relief by the Rolling Jubilee. Right now, people are already buying that bad…

>if the old people were relying on the massive indebtedness of today's college attendees, then that has been a cruel error on their part,

Oh no no... I don't want people to picture an old hag sucking the blood of infants.

To clarify, I was using "grandparents" as a single example to humanize what a "creditor" was. We have met the creditors and they are us.[0] When society complains about the unfairness of student loan debt, we tend to think of the creditors as something abstract and invisible.

The total student debt is ~1.3 trillion[1]. If forced to picture who is owed that money, maybe college kids would think of some evil mustache twirling CEO of Goldman Sachs or Chase Bank. Sure, some fraction of a fraction of the interest payment does go to executives like them but the vast majority of the money goes to us.

That 1.3 trillion is diffused throughout the economy. The pensions of police officers, firemen, and teachers. The car insurance premiums we pay is priced a certain way based on investments that point to those college loans. Etc etc.

At the moment, the struggling college grads are "visible" and the creditors seem "invisible" but trust me, if a political movement gathers steam to ask Congress to forgive those loans, all those invisible creditors will come out of the woodwork at Congressional hearings and fight it.

Trying to convince millions of us to zero out the balance sheets for those student loans will be a huge uphill battle.

[0]riff on: https://en.wikipedia.org/wiki/Pogo_(comic_strip)#.22We_have_...

[1]http://www.marketwatch.com/story/every-second-americans-get-...

Re: Trillions in Bad Loans May Sap World Economy for a Long Time

#27

Post by golergka »

ihsw wrote: post #12

Why not forgive the loans? The negative affect of debt on people's capacity to contribute to the world economy is high, and I think it stands to reason that people would contribute more for the duration of paying off their loan if the loan wasn't hanging over their head. The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place. The intention is to throw people…

What about the people who put their money in the bank, the money that was used to give those loans? People who are relying on their pension plans? Life savings?

What you're saying is that we should _just take money from people_, without expectations to give them back anything directly.

Re: Trillions in Bad Loans May Sap World Economy for a Long Time

#28

Post by dev1n »

redthrowaway wrote: post #3

Almost like the better part of a decade of free money tends to create bad debt.

The free money was supposed to be used in conjunction with increased government spending on infrastructure projects. Unfortunately the latter half of that ideal fell through and banks ended up taking that free money and utilized it in not so good ways.

Re: Trillions in Bad Loans May Sap World Economy for a Long Time

#29

Post by cylinder »

ihsw wrote: post #12

Why not forgive the loans? The negative affect of debt on people's capacity to contribute to the world economy is high, and I think it stands to reason that people would contribute more for the duration of paying off their loan if the loan wasn't hanging over their head. The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place. The intention is to throw people…

Read here, http://blog.mpettis.com/2016/01/will-chinas-new-supply-side-...

tl;dr is China will need to eventually give in and do debt forgiveness. there's strong historical precedent for it.

Re: Trillions in Bad Loans May Sap World Economy for a Long Time

#30

Post by sbierwagen »

twoodfin wrote: post #13
ihsw wrote: post #12

Why not forgive the loans? The negative affect of debt on people's capacity to contribute to the world economy is high, and I think it stands to reason that people would contribute more for the duration of paying off their loan if the loan wasn't hanging over their head. The banks would scream bloody murder, obviously, but their slack policies got us into this mess in the first place. The intention is to throw people…

Imagine you're a bank calculating the interest rate to offer on a loan. Do you think that rate will be lower or higher if you believe there are circumstances wherein the government would unilaterally allow your borrower to cease payment? Obviously, if the government could be metaphysically certain of the loans that would never return another penny and only cancel those, there's no net loss to the bank. But there's no…

  Imagine you're a bank calculating the interest rate to 
  offer on a loan. Do you think that rate will be lower or 
  higher if you believe there are circumstances wherein the 
  government would unilaterally allow your borrower to cease 
  payment?
It is unquestionably true that a debt jubilee would result in higher interest rates. It is somewhat disingenuous to spin this as a negative for people with marginal credit: you only have bad credit if you are very young, or have outstanding debt-- annulling a thousand bucks of debt has dramatically greater marginal utility than the ability to get a loan of a thousand dollars at 15% APR instead of 25% APR.

I also question how long the effect of a jubilee-premium would last. Five years? Ten? Brazil, Argentina and Mexico all defaulted on their sovereign debt in the 80s-- (https://en.wikipedia.org/wiki/Latin_American_debt_crisis ) and they certainly weren't locked out of the bond market forever-- Mexico's 30 year bonds are standing at about 6.8% right now. Gold was illegal to own in the United States from 1933 to 1975, (https://en.wikipedia.org/wiki/Gold_Reserve_Act ) yet investors aren't acting like they're afraid of the government taking their gold again-- it's at $1,155 a troy ounce right now.

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