ONQ's proposal for Universal Debt Forgiveness

[Chris]

Posts like yours make me want to vomit. The "moral hazard" argument is morally bankrupt. You were lucky...end of story.

Moral hazard is what has landed the economy in such a mess, how can increasing this be of any benefit whatsoever.
Luck had absolutely nothing to do with the situation my family is now in. When I was offered a 92% mortgage for 6 times our combined income I took out an 85% mortgage for 3 times our combined earnings. I also made additional payments over 3 years that reduced the LTV to 75% of the original price. We had two modest cars that were over 5 years old. When after 10+ years of house price increases prices started going down I put the house on the market and sold it within 3 months because I had advertised it for 15% less than all other similar houses available in the area. Absolutely none of this was down to luck.
One of my neighbours on the other hand took out 100% mortgage, took out loans and credit card debt to furnish the place, and then after 12 months remortgaged to buy two brand new cars. He is one of the people that is now hopelessly in debt that would benefit from debt forgiveness.

There are people on their knees in this country and they require society's assistance. If there are opportunistic freeloaders out there who will try and abuse any rescue package then we should devise a plan to weed them out. But the existence of such people isn't an excuse to not help those in difficulty. And if people can't be compassionate enough to help others, they should think selfishly about those who are drowning in debt. If there is large scale debt forgiveness, people will re-enter the economy and start spending which should benefit us all.

Those people that are hopelessly in debt should be looking at the personal bankruptcy route, which in my opinion is something the state can actually do something to speed things up.

As for those questioning where the money will come from to fund this debt forgiveness, the money's generally already been provided. The debts have been recorded as bad debts in the financial statements of the banks and written off. The banks' balance sheets have already taken the hit.

Spending is what got us into this trouble. What is needed above anything else is savings. And it is totally untrue to suggest that money is already available for any large scale private debt write off.

 

[Purple]

It took 15 years for Ireland to get itself into this mess, this level of debt. There is no quick fix.
It took the Western World 20-30 years to get itself into this mess, this level of debt. There will be no quick fix.

We in Ireland and the West in general has not been as well off as we thought we were for the last 30 years. We have collectively lived beyond our means for decades and funded it by selling debt to private banks and foreign countries (and, unforgivably, each other). It’s all been a giant ponzi scheme fuelled by debt financed by debt. This is fundamentally unsustainable. The up-shot of this is that we don’t have as much as we thought we had. We’re not as rich as we thought we were. No matter what happens next this truth is unavoidable. The party is over, even if a few people kept dancing after the music stopped.

Given that money markets are interlinked debt forgiveness in Ireland or anywhere else will have know on effects. These will eventually reach the bug creditors, be they banks, pension funds or countries. So we’d end up with bust pension funds, no credit flows and a very peeved China (the country that spent the last 10-15 years buying up American debt to keep the dollar strong and their exports cheap). The Chinese won’t let that happen without a fight and I mean a real fight with guns and tanks and stuff. Historically plenty of wars and invasions have been started over debts and even bond markets (the British and French invaded Egypt over bond defaults).

To summarise; ignoring the immorality and unfairness of debt forgiveness (universal or otherwise) it is still not a silver bullet and it isn’t something that we can do on our own.

 

[onq]

When I was offered a 92% mortgage for 6 times our combined income I took out an 85% mortgage for 3 times our combined earnings. I also made additional payments over 3 years that reduced the LTV to 75% of the original price. We had two modest cars that were over 5 years old. When after 10+ years of house price increases prices started going down I put the house on the market and sold it within 3 months because I had advertised it for 15% less than all other similar houses available in the area. Absolutely none of this was down to luck.

I am hugely impressed at your canniness and apart from your selling of the house at the right time and the right price, this broadly mirrors my own experience. I sold two houses to buy one and didn't extend, merely renovated bathrooms and the utility. I didn't buy cars on the mortgage. I didn't buy a second home or a buy to let. I generally stayed within my means and my overdraft and loans were well-managed and I didn't miss payments. Any subsequent difficulties have arisen not from a lack of prudence, competence or willingness to work, but simply a lack of work in the building industry.
However let's not confuse fiscal prudence with morals.

One of my neighbours on the other hand took out 100% mortgage, took out loans and credit card debt to furnish the place, and then after 12 months remortgaged to buy two brand new cars. He is one of the people that is now hopelessly in debt that would benefit from debt forgiveness.

(nods)

We seemed to be surrounded by such people at one point. They are for the moment married, significant property holders and parents. The current review of debt as as part of its aim the continuation of this status quo.
The problem is that if everyone pursues all such people for debt recovery and takes goods in lieu, these people will have no place to live, possibly no means of support, no transport and their kids will suffer hugely.

Sean Gallagher reports that debt forgiveness is an issue repeatedly raised by voters.
Its all too easy for people with huge financial acumen and a moral imperative to dismiss this out of hand.

I have considered total debt forgiveness to see what might be possible, and the view of many is that its not possible.
I believe that if we don't traverse this possibility early, and have intelligent voices making useful comments now, it could mushroom.
Debt forgiveness important concept to the people of Ireland than seems to be accorded to it in the media so far and it needs careful handling.

Finding billions to plug the holes in bank balance sheets while offering no real alternatives to those caught in the wrack appears to be politically unwise.
Locally we may be able to deal with the problem with a streamlining of the bankruptcy laws, but that seems to be a form of specific debt forgiveness by another name

Globally however, if we don't find some sort of reset button, then I fear that the global situation, with interest on the principal growing and large economies like America simply continuing on running up huge deficits and rolling over loans to finance wars and huge military spending, is unsustainable.
This is the reason I considered universal debt forgiveness in the first place.

 

[goingforgold]

Locally we may be able to deal with the problem with a streamlining of the bankruptcy laws, but that seems to be a form of specific debt forgiveness by another name

Yes it would be a form of specific debt forgiveness, but a properly structured one. If you have negative equity and savings you'd have to give up your savings as part of any deal and possibly move to a more modest property to reflect the debt forgiveness.

I think most people on this thread agree that something needs to be done but we also agree that it has to be done right. We cannot simply reward those with big debts and big properties and effectively punish those who don't. There's an old saying, no such thing as a free lunch!

Excellent thread ONQ - has opened up some interesting debate.

 

[onq]

Thank you goingforgold - that is the purpose of taking an extreme position and thanks are due to Brendan for extracting this thread from the Morgan Kely thread and retitling it appropriately.

I believe that if we don't recognize, address and traverse issues like this now, we could end up with a relatively uninformed electorate sending petititions to vote-getting TD's looking for outrageous support for their financial position involving debt forgiveness in the millions range.

Many of those affected could be prominent members of their local community and could sway voters to their way of thinking, while the support already given to banks for what many feel was their reckless fuelling of mere speculation on the property market has undermined the ability of any government to credibly refuse aid.

Its important to draw a distinction between necessary aid to keep the financial system going until we get through this and not bring down the Euro if we were to fail, and supporting people who were reckless in their spending patterns - some of whom still are, but the looks of things!

 

[Purple]

ONQ, just adding thumbs-up to a good thread that's started an interesting discussion.

 

[onq]

Thanks Purple,

Many people think that taking an extreme position is trolling, but I have always found it to be the opposite.
Yes trolls superficially make outrageous statements, but their intention is solely to disrupt a thread - mine is not.
My intention is to take an extreme position for the sake of argument, because this can bring a better perspective than a narrower focus.

I try put ideas to people they might otherwise simply reject out of hand because of long practice or experience, to get them to think about things again in the new context.
Its similar to what I've always had to do practicing architecture to "keep fresh" and its not easy and it does take up time.

The scale of the financial situation we're all going through warrants all of the people who can think to use this time to think afresh.
In a forum like this they can explore new concepts and challenge accepted thinking even if we all end up back where we started from.

The benefit is that newcomers to the debate or people without much in the way of numerate or accounting or financial skills can find their way among unfamiliar concepts and better understand the result.
Traversing the issue and arriving at a strategy logically having looked at all the alternatives, however whacky they seem, is much better than a top-down edict simply saying "No, here's what we'll do."

 

[onq]

So we’d end up with bust pension funds, no credit flows and a very peeved China (the country that spent the last 10-15 years buying up American debt to keep the dollar strong and their exports cheap). The Chinese won’t let that happen without a fight and I mean a real fight with guns and tanks and stuff. Historically plenty of wars and invasions have been started over debts and even bond markets (the British and French invaded Egypt over bond defaults).

I'm glad you raised that point Purple.

Look at the previous major financial crises (I know there may be others) and their follow-ons. These may not be seen as direct follow-ons, but they followed on, if you get my drift.

1907 Bank Crisis --> 1914 WWI

1929 Wall St. Crash --> 1939 WWII

2008 World Financial Crisis --- 2018 WWIII?

My initial impulse for considering Universal Debt forgiveness was to have some other alternative to waging a third world war - this may be the inevitable consequence we face - a win for arms manufacturers, with investment again financed by the banks and the entire world hopelessly in debt to them. Well we all embrace something like Universal Debt Forgiveness then, I wonder?

But even if this possible future doesn't come to pass, unless we overhaul the current system which rests on valuations of goods and services which as you have pointed out are entirely relative, provides liquidity by interest-ridden credit, and supports a small percentage of "winners" who routinely extract wealth from the system, this isn't going to improve any time soon.

That's because leading governments have settled into the idea that as long as they can continue to afford the interest, the financiers will happily roll over and even increase the debt.
Sovereign government are now so indebted that they are effectively dependent on unelected financiers beholden to no one controlling the world economy. That bothers me.

 

[Purple]

Sovereign government are now so indebted that they are effectively dependent on unelected financiers beholden to no one controlling the world economy. That bothers me.

This is mainly a Western issue which is the point I make above.
Of course the unelected financiers don't operate in a vacuum either so in the end they depend on Joe Blogs buying that TV or iPod to keep the wheels turning. Free democratic countries are the ones with the rich consumers ergo it is in the long term interest of these masters of the universe to keep the world free but in the short term they want to screw them to maximise their profit. Strange how circular the whole thing is.

 

[onq]

+1 Purple,

You make it sound almost - dare I say it - "sustainable".

Sustainable that is for those at the top of the pile.

 

[Gekko]

Why not do the following?

Write people's mortgage debts in relation to their principal private residences back to (say) 80% of the value of the home. Only write off loans for the purchase, improvement or repair of the property. This is easy enough to calculate as it was the criteria used for mortgage interest relief (where "top ups" for other items were excluded) and standard rental income calculations.

That way you don't reward those who've taken out equity for ridiculous reasons. The moral hazard is doing nothing to help people.

 

[ontour]

Gekko,

The LTV is not directly correlated to people being in difficulty. There are many people in properties that have LTVs higher than 80% who can afford their mortgage payments and whose property suits their needs.

Having an LTV above 80% does not mean that you did not remortgage to buy a fast car, a big extension or nice holidays.

 

[Chris]

I am hugely impressed at your canniness and apart from your selling of the house at the right time and the right price, this broadly mirrors my own experience. I sold two houses to buy one and didn't extend, merely renovated bathrooms and the utility. I didn't buy cars on the mortgage. I didn't buy a second home or a buy to let. I generally stayed within my means and my overdraft and loans were well-managed and I didn't miss payments. Any subsequent difficulties have arisen not from a lack of prudence, competence or willingness to work, but simply a lack of work in the building industry.
However let's not confuse fiscal prudence with morals.

To be honest I don't think it is canniness. I basically stuck to the mantra of spend what you have and don't borrow for luxuries. While there have been some exceptions where I took out interest free credit to buy a TV or car, I did so while having the cash already saved. Over the years I have had many people criticize and even make fun of me for the way I approached my finances. What annoys me most is that some of the same people now say I was so lucky, when luck had nothing to do with it, just simple financial prudence. And this is something that has gone very astray in this country in general.

The problem is that if everyone pursues all such people for debt recovery and takes goods in lieu, these people will have no place to live, possibly no means of support, no transport and their kids will suffer hugely.

I disagree, if they lose their house and the content they will still be able to rent. But this seems to be a touchy subject with a lot of people in Ireland. Since we sold the house in early 2008 we have been renting and moved three times before we found the right house with a great landlord. The mentality from all my Irish friends and colleagues was that I should wait 6 months for things to settle a bit and then use the proceeds from the house sale to have two house deposits. When I said that I was going to wait years before I even consider buying a PPR I was again criticized and ridiculed. What I am basically saying that there is absolutely nothing wrong with renting whether single, as a couple or as a family, whether it is by choice of force of situation.

Sean Gallagher reports that debt forgiveness is an issue repeatedly raised by voters.
Its all too easy for people with huge financial acumen and a moral imperative to dismiss this out of hand.

Of course some voters are going to raise this, but everybody tries to get something for free, and people in general are pretty averse to accepting that they made a mistake and they have to live up to it.
I would also not say that it takes any significant level of financial acumen to not have ended up in dire financial problems, especially on the scale we are seeing in Ireland. If we now reward people for having made bad financial decisions, even if everybody seemed to be doing the same, then society will not learn from the mistakes made. The lesson will be that if things get really bad, others will pick up the tab.

Finding billions to plug the holes in bank balance sheets while offering no real alternatives to those caught in the wrack appears to be politically unwise.
Locally we may be able to deal with the problem with a streamlining of the bankruptcy laws, but that seems to be a form of specific debt forgiveness by another name

I fully agree. But the mistake was to plug the hole in the banks by bailing out bank creditors, and this mistake should not be repeated again.
I honestly can't see how any other approach, other than through official bankruptcy procedures, can avoid a situation where the financially imprudent end up better off than the financially prudent. This is totally and utterly unfair and immoral. But you are right, it is a form of debt forgiveness or simply default. And there should be a lot of it, but it should only be at the expense of the creditors and not the involuntary taxpayer.

Globally however, if we don't find some sort of reset button, then I fear that the global situation, with interest on the principal growing and large economies like America simply continuing on running up huge deficits and rolling over loans to finance wars and huge military spending, is unsustainable.
This is the reason I considered universal debt forgiveness in the first place.

I agree, a lot of debt will have to be written off, but again it should under no circumstances be at the expense of the taxpayer. But what we are seeing now is governments around the world scrambling to patch holes on a sinking ship. Governments created the debt problem and now everyone is expecting that the same institutions are actually able to fix the problem with more interventions that do not force all the burden on the creditors.
I fully agree with Purple, it took a long time to build up this debt and there is not going to be a simple or quick solution. But what governments have been doing for the past 4 years has only made things worse.

 

[Firefly]

Since we sold the house in early 2008 we have been renting and moved three times before we found the right house with a great landlord.
...
What I am basically saying that there is absolutely nothing wrong with renting whether single, as a couple or as a family, whether it is by choice of force of situation.

Hi Chris, in the absence of proper rental laws here as per the likes of France/Germany I don't think that renting can offer the same form of stability for a family with children (assuming that people can afford what they buy and don't have to sell and put strain on the family). If the children are moving around frequently it would be unsettling as they would be constantly making new and leaving old friends. Also, there is the "time limit" for mortgages....unless someone has significant deposits then they could quite quickly run out of time by being too old for a 20 year mortgage. Again, proper rental laws would help here. If the accomodation was good and rents were cheap then people would have so much more disposable income that they could spend/save/invest etc, never mind the anxiety of hearing about interest rate rises.

 

[Mpsox]

In terms of debt forgiveness, to me, there are 3 kinds of people. Firstly, there are those who have lost their jobs and are struggling to pay things back, and secondly, those who got completely carried away and borrowed left right and centre and even if they are working, can't carry the debt burden they've loaded on themselves. In addition, we're losing flexibility in the workforce due to the inability of people to move for work due to negative equity. Therefore I don't believe a "one size fits all" approach to debt relief works and each strand should be handled seperately.

One thing that is often forgotten is that a mortgage is a long term commitment on both sides. The issue should not be, can a person pay back their mortgage now, but rather can they pay it back over 25/30 years. Hence, we need far greater flexibility from banks then we currently have to allow people to get back on their feet if they loose their jobs. If that means interest only for 5 years, so be it.

Secondly, people need the flexibilty to move and if that means carrying negative equity on to another property, so be it. Yes it is a more risky loan for the bank (neg equity would be unsecured) but possibly some sort of a state guarantee in specific circumstances could suffice.

In terms of those who borrowed to the hilt, then they should be made to make all reasonable efforts to pay back their debt, and if that is not feasible, they should file for bankruptcy and deal with the consequences. Remember, lenders accept a risk when they lend money and part of that risk is that they could take a hit. It's an old saying in banking is that the worst lending manager you can have is someone who never had a loss, (since it meant they never leant anything). I'm annoyed enough at bailing out builders, I'd be even more annoyed if I was asked to contribute to the loan someone took out for a 42" inch TV

 

[onq]

In terms of debt forgiveness, to me, there are 3 kinds of people. Firstly, there are those who have lost their jobs and are struggling to pay things back, and secondly, those who got completely carried away and borrowed left right and centre and even if they are working, can't carry the debt burden they've loaded on themselves.

That's two kinds of people Mpsox.What's the third?

 

[onq]

I disagree, if they lose their house and the content they will still be able to rent. But this seems to be a touchy subject with a lot of people in Ireland. Since we sold the house in early 2008 we have been renting and moved three times before we found the right house with a great landlord. The mentality from all my Irish friends and colleagues was that I should wait 6 months for things to settle a bit and then use the proceeds from the house sale to have two house deposits. When I said that I was going to wait years before I even consider buying a PPR I was again criticized and ridiculed. What I am basically saying that there is absolutely nothing wrong with renting whether single, as a couple or as a family, whether it is by choice of force of situation.

I wasn't decrying their renting Chris, far from it.

My parents rented for years - although like most landlords he did very little with the house, but then there wasn't a lot to do.
I lived in rental accommodation with my wife during our engagement - our only problem was the restriction on keeping pets, which we ignored.

Indeed I was kicking myself for not doing likewise in terms of switching house in this estate - given the market and the cost of renting it makes a lot of sense.
On the other hand being prudent with borrowings and negotiating an interest-only mortgage for a while allows you to maintain a performing loan and keep your property.

Horses for courses.

 

[Purple]

That's two kinds of people Mpsox.What's the third?

There are 3 kinds of people; those who can count and those that can't.

 

[PaddyBloggit]

That's two kinds of people Mpsox.What's the third?

I reckon these are the three that Mpsox refers to:
(Bulletpoints are my own)

....

1. Firstly, there are those who have lost their jobs and are struggling to pay things back, and ....
2. secondly, those who got completely carried away and borrowed left right and centre and even if they are working, can't carry the debt burden they've loaded on themselves.
3. In addition, we're losing flexibility in the workforce due to the inability of people to move for work due to negative equity.

 

[onq]

There are 3 kinds of people; those who can count and those that can't.