Thursday, June 25, 2009

A Plan For Debt Relief

Following my previous post on The Spectre of Default, here are some ideas for a workable household debt relief program in the U.S. The name is not really important: debt destruction, default, cancellation.. but the end result MUST be the reduction of debt as a percentage of earned income.

(Please note that I do not espouse government debt default. Seeking Alpha, who get a feed of my postings, for some reason initially altered the title of my previous post on their site to The Spectre of Government Default, adding the word "Government" on their own, thus significantly altering its meaning. That was unfortunate.)

Debt relief must happen within the context of comprehensive transformation of the economy. It would make no sense whatsoever to provide debt relief, only to see borrowing come roaring back.

Thus, first some proposals on altering the foundation of our economic and financial system:
  1. Tightly regulate money supply by linking its growth to renewable energy and the creation of a Sustainable Economy. That's my Greenback proposal.
  2. Start actively dismantling the Permagrowth Economy. Some suggestions could be to tax "black" energy heavily, cap and trade greenhouse gas emissions and impose a national Value Added Tax (VAT) on all transactions.
  3. Place the financial sector back at the "tail" of the economy, where it belongs; it is the dog that should wag its tail, not the other way round. One example would be to gradually increase reserve ratios and capital requirements for banks (e.g. Tier I capital to 20%).
  4. Cease all financial sector bailouts and, where practicable, ask for the government's money back, with interest.
The above measures will not only curtail credit supply (i.e. loans offered by banks), they will also serve to reduce credit demand from consumers and business, immediately and in the future.

As to debt relief and destruction, specifically:
  1. Re-work laws to make it easier and less onerous to file for bankruptcy. It should be noted that such laws were made much more restrictive under the Bush administration.
  2. Haircut all existing student loans by 50%, with creditors taking the loss. Education is a benefit to the entire society - banks and investors included. It isn't and never should have been a product to be bought and sold on credit. All subsequent loans to be severely regulated and restricted.
  3. Re-instate usury laws on all borrowing, future and existing. This would mean the effective reduction in interest rates to a national maximum, say no more than double the equivalent Treasury bill or bond yield, depending on duration. It makes no sense for the people as a whole (i.e. the government) to borrow at 3% and people individually to have to pay 23% (e.g. for consumer credit).
  4. Withdraw all government loan guarantees and replace them with FDIC insurance per individual (not account) of up to $500,000.
  5. Wipe out all second mortgage/home equity loans up to a maximum of $50,000 for those households making up to $50,000/year pre-tax (that's the median household income for the lower 60% of the population). Forbid all subsequent second mortgages - a house is not and never should have been an ATM machine. It's a place to live in, i.e. a shelter.
I do have more ideas, but I have to stop here. A long weekend beckons..

23 comments:

Michael said...

Hell,

Concerning your recent experience with Seeking Alpha, here's a link to a post by Mike Shedlock explaining why he disassociated himself from Seeking Alpha.

http://globaleconomicanalysis.blogspot.com/2008/10/not-defending-mosaic.html

Michael

Blue Peter said...

“Wipe out all second mortgage/home equity loans up to a maximum of $50,000 for those households making up to $50,000/year pre-tax (that's the median household income for the lower 60% of the population).”

Would those making up to $50,000 p.a. who didn’t take out a second mortgage, because it was irresponsible, feel a bit miffed about this?


Peter.

Greenie said...

Long weekend?

yoyomo said...

Bank Leumi maintains branches in NY;I wonder if it would qualify for debt relief from the Fed under TARP to help get it through this little embarassment:

"Analysts said the bank’s role is only the tip of an iceberg in which Israeli companies and state bodies could be found to have withheld billions of dollars invested by Holocaust victims in the country -- dwarfing the high-profile reparations payouts from such European countries as Switzerland."

"Shraga Elam, an Israeli investigative financial journalist based in Zurich, said after the war many Israelis showed little sympathy for the European Jewish refugees who arrived in Israel.

“David Ben Gurion [Israel’s first prime minister] notoriously called them ‘human dust’, and I remember as children we referred to them as sabonim, the Hebrew word for soap,” he said, in reference to the rumoured Nazi practice of making soap from Jewish corpses.

“In fact, I can’t think of any place in the world where [Holocaust] survivors are as badly treated as they are in Israel,” Mr Elam said.

He said Bank Leumi’s “lost” accounts were only a small fraction of Holocaust assets held by Israeli companies and the Israeli state that should have been returned. The total could be as much as $20bn."

Considering how much grief the Swiss banks got 10-12yrs ago, the irony factor here is just too rich for words. The wheels are coming off of Herzel's toy wagon and They know it:

"Last year the Israeli media reported an investigation showing that the finance ministry destroyed its real estate files in the 1950s, apparently to conceal the extent of the state’s holding of Holocaust assets.

The case against Bank Leumi may end the generally muted criticism inside Israel of the banks’ role. Officials and even the families themselves have been concerned about the damage the case might do to Israel’s image as the guardian of Jewish interests.

In 2003 Ram Caspi, Bank Leumi’s lawyer, used such an argument before the parliamentary committee, warning its members that the US media “will say the Israeli banks also hide money, not just the Swiss”."

fat_tail_rider said...

Apropos of Blue Peter's reaction to your debt-forgiveness proposal for people making less than $50k, I am constantly amazed at what triggers people's sense of outrage. I have a friend heavily into "personal responsibility" who grows angry every time he drives by a house in a low=income neighborhood with a satellite dish on the roof. Yet he is perfectly fines with the TARP, the multibillion passthroughs to counterparties in the AIG bailout, and the obscene bonuses to GS execs that the various taxpayer-funded bailouts of Wall Street have enabled.

Oregon Guy said...

Never happen here. See Neitzsche and his exposition on the concept of ressentiment for the reason why.

That said, I agree. It makes no sense to make wealthy debt-holders whole at taxpayer expense while the debtors remain in peonage.

OkieLawyer said...

Hell:

As a former bankruptcy attorney, I didn't like the changes in the law in 2005 any more than other consumer BK lawyers. But I am more interested in first taking the main cause of bankruptcy away: medical debt. Medical debt is the primary cause of 60% of bankruptcies in the U.S.

Most people I have been asking while on vacation still think that overuse of credit (credit cards, buying too big a house, etc.) is the biggest cause of bankruptcy. It is understandable given the focus on credit card debt and overspending on such shows as Dave Ramsey and Suze Orman combined with radio and television advertising from companies that claim they will help you reduce your credit card debt.

(I am adding emphasis here to focus on the limited debts that they promise to help debtors with.)

Without a national healthcare system, we will never resolve the crushing debt on the middle class. It's that simple.

I also think the amount of fraud that pervaded our economy -- particularly the mortgage market -- magnifies the ferocity of this economic storm. Lenders, who rewarded appraisers that came up with the "correct" values, are the most responsible for this mess. They are now demanding that they receive full compensation from taxpayers for their inflated loans based on inflated appraisals in which they encouraged borrowers to inflate their incomes to justify said loans. It is outrageous.

There has been a concerted attempt to lay the blame at borrowers for "borrowing more than they knew they could pay back." But just as medical professionals and attorneys are held to a higher standard because of their superior knowledge in their given fields, I believe financiers should be held to a higher standard when it comes to financial matters. They understand the math. Therefore, they have no excuse and should not be allowed to shift the blame to debtors. (We used to have laws against predatory lending that we used to enforce. Whatever happened to those laws?)

While I would agree that even outside the medical question, there is far too much debt. However, it is also true that the working class has been pushed into this debt under various public policies (education debt, stagnated wages, etc.) that you have done a good job of pointing out time and again.

Back to the bankruptcy issue, compare the rules as they apply to consumers versus what they are for Chapter 11 (corporate reorganization or large and wealthy debtors). One of the rules that I find outrageous is allowing CEOs and top management being allowed to take pension funds of workers as part of Chapter 11 bankruptcy proceedings. As I have said before, outside of bankruptcy, we would call this embezzlement.

A couple of days ago, I was talking to a solicitor (attorney) from England about the differences in our respected legal systems and public policies. She asked me: "Why are all the laws in the U.S. designed to benefit the rich?" I didn't really have a good answer for her. Frankly, I would like to know myself.

OK, I'll get off my soapbox now.

Greenie said...

"She asked me: "Why are all the laws in the U.S. designed to benefit the rich?" I didn't really have a good answer for her."

Is that a frivolous or serious comment? By now, even a blind person can see that the US political system is captured by the financial oligarchy, who write laws to enrich themselves.

Anonymous said...

Turing a blind eye to illegal immigration is also a benefit to the rich and a tax on the middle class.

-takes away fall-back jobs on the middle class and students
-pushes down wages: if you hire Americans they will demand higher wages and benefits for jobs such as picking fruit in baking sun all day long

ect...

We need to round up and deport all illegal Mexicans back to Mexico. Yes it is not "thier" fault but there are in this country illegally. TOO BAD. Party if Over. Mexico Needs to take care of thier own poor.

Mexico is a very, very racist country. Latinos in general are very racist.

Anonymous said...

Why are the laws for the rich?

I assume that must be a rhetorical question...

Anonymous said...

Ever seen anyone achieve such a world-wide unity? from Pakistan, to Japan, to Norway, to Brazil, to China, to America,...

Micheal Jackson RIP

All except Fox News Fascist Anti-American Scumbags - Kick a Fox News Watcher in the face today!

mannfm11 said...

Laws are written to benefit lawyers first and rich second. As far as wiping out debt, the better idea is to wipe out the fractional reserve system that allows for the bestowing of titles of nobility on a small group of bankers. There is clearly a risk and return phenomenon today where the risk taker is supposed to win, which flat out defies the idea of risk to begin with. Instead, those that lend credit at 23% should lose enough out of their portfolio that their after loss return is hardly worth the effort. Instead, the game is tilted to allow for continued benefit to the risk taker. The wall street firms should have been wiped out along with all the paper that followed them, but the perception is that if we go through a depression it would be so horrible. Instead we go through perpetual bondage of the entire society save a few. The founding fathers of the US knew that allowing for credit creation to replace money was the death of a country. The US has been dismantled by continued support of this system. There should be no FDIC insurance. There should be the matress.

Hellasious said...

I do agree that medical system reform is a high priority. It is utterly ridiculous that the US is the ONLY major nation without a comprehensive public health scheme.

Thai said...

Cool, health reform.

When you say "It is utterly ridiculous that the US is the ONLY major nation without a comprehensive public health scheme."

Does that mean we spend more, less or the same?

Does that mean we spend the amount we spend to choose differently?

Care to suggest a few solutions?

Thai said...

sorry typo, I meant to write "does that mean the amount we chose to spend should be spent differently?"

And if so how?

Hellasious said...

Health reform = universal health coverage. It's not so much a matter of how much is spent, but how it is spent.

This also requires tort reform, as Okie will most certainly assure us.

OkieLawyer said...

Re: Tort reform

Unlike the advocates of "tort reform" that usually get noticed (those that argue for capping damages, i.e. insurance companies), my argument is that once you have a national healthcare system in place, damages will fall by themselves. Currently, medical costs have some relationship to damages. Oftentimes, (this is a "dirty little secret" in the law practice) attorneys have to haggle over medical bills to get the medical bills down low enough so that a settlement can be made. With a national healthcare system in place -- where medical bills are already taken care of -- the only issues left are "pain and suffering" and lost wages, if any. For most cases, neck sprains can be standardized as to compensation (say, $1000) and most people would accept that and go on (and most people probably would not even need an attorney). There would be very little litigation. If there are broken bones, you could use a system similar to worker's compensation that has standardized formulas for how much that would be worth. An arbitration court could be set up that would quickly and pretty efficiently process claims.

What I don't like is "capping" damages where someone has intentionally harmed others (aka punitive or exemplary damages). This is often what is referred to as "tort reform."

Thai said...

apparently not ;-)

@Hell re: "It's not so much a matter of how much is spent, but how it is spent."

Which has been my point all along and which many of your readers seem to consistently forget.

Care to share with us how you would define health care dollars as being well spent?

I seemed to remember you once referred to health care spending as "lifestyle"- is it at least fair to sense a change in tone, if not substance?

Debt Settlement said...

I agree with you that Debt relief must happen within the context of comprehensive transformation of the economy. It is truly non-sense to provide debt relief if you keep on borrowing money.

debt consolidation said...

Analysts said the bank’s role is only the tip of an iceberg in which Israeli companies and state bodies could be found to have withheld billions of dollars invested by Holocaust victims in the country -- dwarfing the high-profile reparations payouts from such European countries as Switzerland.

credit card relief said...

Very interesting news about Seeking Alpha. I didn't realize that was the case at all. Thanks Michael.

websmsmessagess said...

Thanks for sharing these info with us! I was reading something similar on another website that i was researching. I will be sure to look around more.new year messages

websmsmessagess said...

Thanks for sharing these info with us! I was reading something similar on another website that i was researching. I will be sure to look around more.new year messages