Tuesday, November 29, 2011

Give money to the public, not the banks

Debt Cancellation without Chaos

We need a debt jubilee, as a first step to correct the system failure that is the current debt crisis. Giving cash to debtors instead of lenders would be effective and fair if those not in debt also received a boost. It needn't go on a consumer binge either we could insulate people's homes or capitalise renewables projects. And here is Steve Keen saying much the same thing on the BBC: http://www.youtube.com/watch?feature=player_embedded&v=XQEsMXq3TrM

Posted by nickb @ 11:27 PM (2426 views)
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24 thoughts on “Give money to the public, not the banks

  • general congreve says:

    Got a couple of grand limit on unused credit cards all set for the green light to purchase that new 3D TV. Just say when.

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  • so people get rewarded for being irresponsible with their money , and the poor workers and pensioners who have scrimped and saved and lived within their means gets turned over again

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  • mr messy 2:40 on in the short video. You are confusing a moral argument with an economic one. BTW (luckily) I am not part of the heavily indebted class. However if this was done there would have to be some sort of formula. For example you cant pay off some bankers multi-million pound mortgage, it would have to be based on equity remaining in a place. And yes what about renters etc.But even if the argument is morally repugnant the real question is, is it economically justified?

    I am a big fan of keen, but , for me , on this one he hasnt quite yet joined the dots. Whether this is a political flyer or not (i very much doubt it for the reasons you state, and because the tories are in charge) is another issue. At most i think it MIGHT be done for businesses but the man on the clapham omnibus?

    As for the woman on the Croydon tram!!!!

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  • For full hardtalk interview :

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  • In fact the last couple of minutes (saucy) Sarah Montague asks can Keen see anyone politically who will take up his prescription. Keen answers “Not at the moment” but continues : “if Obama came to power in 2012 instead of 2008 then because of his charisma [and by then Keen implies that the fact that the QE / ZIRP medicine isnt working would be obvious] then yes, but no i cant see anyone on the horizon who would apply this”.

    Two reasons : 1. Politically far too radical 2. Advisers have their background in Economics in “neo-classical” ism.

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  • Also : This is what Keen said about the bailouts in 2008 “its like using a thimble on the upper deck of the Titanic…. the ice berg has still hit, its the Engine room they should be worried about”

    Nice post Nick!

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  • The economists may talk about debt write downs, but I doubt that it will pass all the way down to the consumer. What they are discussing is writing off is national debts or perhaps losses at the failing banks, but I doubt they would ever write off individual mortgages or business loans.

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  • I think some sort of Global agreement to restructure the mess of interlinked and ultimately meaningless debt could in theory be reached. This would need to be combined with bank and central bank reform in order to reduce future abuse of big money via unsustainable credit expansion, and speculation in essentials.

    Fundamentally the world as a trading entity works, standards of living on the whole are improving and there is no obvious reason why that can’t continue, subject to ensuring we innovate sufficiently to deal with depleting resources and growing population.

    Viewed globally the debt is more virtual than real.

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  • Difficult times demand exceptional solutions.

    Credit card debt is pernicious, in that the weak-willed (of which there are many) get sucked in and are then callously milked. The card industry needs tighter reins and regulation, and for all forms of consumer credit, there should be a national maximum interest rate, with deterrent penalties for loan sharks.

    But card debt is not a virtuous subject for debt forgiveness.

    Mortgage debt forgiveness, in the wake of severe house price falls (as has happened in the US, and will happen here) is much more worthy of consideration. Everyone has to live somewhere, and those who felt obligated to pay over the odds for a home feel the pain of negative equity.

    Of course, the debt free will snort with indignation; but both in the US and UK, the action of writing off a percentage of existing mortgage debt would almost certainly result in a far greater boost to the economy (thereby benefitting everyone, including the debt free) than currently results from the incestuous bond-buying of the QE program.

    So given the choice of another round of QE, or a 10% write-down on all mortgages taken out in the five years prior to the housing market peaking, I would advocate the write-down, even though I don’t personally have a mortgage.

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  • And, as a saver, can I have a slice of the cake please?

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  • i remember the 90`s says:

    To be frank Mr g i think people of my age (54) and yours have already had our cake .!!!!!!!!

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  • Mr G, your personal preferences are of limited relevance

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  • “This would need to be combined with bank and central bank reform in order to reduce future abuse of big money via unsustainable credit expansion, and speculation in essentials. ”

    Yes but would that happen? Isn’t that like Glass Stegall. i.e. history tells us that enactments are repealed when their time has really come ?.

    To a certain extent banks probably wouldn’t create risky loans, or at least would cut back on them anyway, until the next boom when such an act would be cited as stifling credit markets and innovation.

    The whole interview is worth watching as Keen does try to answer some of these questions. Generally I agree with UT. But politically thats a Quantum leap for the majority of the country to accept. Thats exactly what Sarah asks and exactly what Keen responds with.

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  • Looking at a different perspective, why not reduce the pension age, thus freeing up jobs for the unemployed? Whatabout the govt buying up the houses of those struggling with a mortgage and turning them into social housing – this would bring a supply to replace those they are selling (giving away).

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  • we could insulate people’s homes or capitalise renewables projects
    If you give the great unwashed a wad of cash, they’ll either use it to pay off their debts (causing debt deflation), or more likely they’ll go out and buy a great big 3D TV. They aren’t going to waste it on insulating their homes.

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  • general congreve says:

    @9 – I agree mortgage debt forgiveness would be a fantastic idea, it would mean many of my friends with large mortgages wouldn’t be financially ruined and could get on with their lives, it would boost the economy by freeing up money from pointless debt servicing and it would most likely instantly create an HPC equivalent to the proportion of debt forgiveness, e.g. if 50% of every 100% mortgage is forgiven, we’ll see a 50% HPC, as people can and will now sell at that discount as that is all they need to remain in equity. So it would be a winner for all those slogging it out on the sidelines waiting for prices to become reasonable and a winner for all those desperate to sell at a level that keeps them solvent, so they can get on with that divorce, job relocation, up-sizing, downsizing etc.)

    Having said all that, the issue of debt forgiveness is not a simple one. For every person who has his debt forgiven, someone somewhere must be taking a loss. That ultimately means savers, because if mortgages are forgiven that will make banks insolvent and savers lose. Of course, this can be managed by pumping loads of QE into the banks to restock their balance sheets, so savers don’t lose deposits, however, especially in light of the economic boom and corresponding leap in the velocity of money debt forgiveness will bring, this new money will be highly inflationary.

    I don’t think there’s a free meal ticket that makes everyone happy.

    But I agree with Keen, we need to get rid of the debt and get back to a monetary system where these imbalances can’t build up. Letting the free market sort it out is probably fairest.

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  • If you lied about your income on a self certified mortgage, are not saving while IR’s are at historical lows and then struggle when IR’s go back to ‘normal’ then you should have your house repossessed if you can’t keep up payments.

    Otherwise debt forgiveness means that when the good times come back people do it all over again. Many here believed banks should have been left to go bust rather than bailed out so why should individuals be.

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  • “For every person who has his debt forgiven, someone somewhere must be taking a loss”

    Not if the funding is new cash created by the BoE, in lieu of QE

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  • Tommyr i refer you to the answer given by (my Rt Honourable Friend) Uncle Tom, the member for the common good – some moments ago !

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  • general congreve says:

    @17 – You see, the saver either takes a direct hit by his bank going bust, or the money is printed to keep his nominal deposit safe. The second scenario is massively inflationary, and consequently will probably also lead to a further devaluation of the currency via the currency markets, so the value of savings will take a massive hit anyway.

    The system is broken and there is no easy fix. If you are a saver and you stay in sterling, you are for the chop either way.

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  • Another stupid idea! By all means, write off all debt. This is the short path to deflation, meaning a proportional drop in asset prices. Alternatively, please print lots of cash- this is the short path to inflation! Yes, our assets increase in value, but so does the cost of eveything else in proportion! There is no easy way out of this mess, it’ll take several years (or never if you factor in peak oil) to get back on the trajectory the ecnomy was on pre-2008.

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  • It may help solve the current problem and boost growth but if people are just bailed out then the same thing happens again in x years. Just like the bankers they won’t learn from their mistakes and will do it over again and hope for another bailout.

    Therefore debt forgiveness may help to sort out this crisis but helps cause another further down the line.

    @19 GC – I’m a saver, in sterling and don’t think I’m for the chop. If banks go bust my savings are safe (just make sure you have less than £85k in each banking group) as they are guaranteed.

    The 2nd scenario of high inflation impacts on my savings but its better holding cash than jumping late onto the Gold bus. Anyway BOE forecasts say inflation will fall back sharply in 2012 and they are generally right 😉

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  • general congreve says:

    @20 – Best of luck Tommy!

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  • @tommyr
    Debt reduction, possibly via forgiveness, is only the part of the solution, and quite urgent to make the Depression shorter and less severe. All private financial organisations must also loose the license to create fractional reserve fiat debt, and not be allowed to use retail and normal business deposits for any leveraged investments e.g. derivatives.

    You have already made a substantial loss (I know, I lost plenty in fiat currency ‘savings’ in a bank account until I woke up in 2007) , and your losses will only grow as the prices for essentials continue to rise; while those of us in hedges (e.g. PMs and other physical resources) will loose far less and even make ‘gains’, unintentionally at your cost!

    Gold and other PMs will go a lot higher because there is no sign of any realistic remedy for the on going world-wide economic train wreck; the current dips are probably due to combination of blatant paper and margin manipulation, selling by weak money and speculators, selling to raise funds to pay for losses caused by the developing EU crisis, and selling to boost dealer balances for year-end bonuses.

    Best wake up, fiat currency is not king, cash (money) is king, and PMs are the best cash during current conditions.
    Note: Fiat currency and government bonds do not fulfill all the requirements to be classed as money, despite classical economics and state propaganda to the contrary.

    Because of the forthcoming flawed government pensions changes caused by complacent dependents, my employer has been forced to preemptively reorganise its pension provisions, to my detriment; so I now have an even lower opinion of those who are too damned complacent to sort out their finances now, thus become less of a future tax burden to those of use who do!

    The global economy servicing period has elapsed after significant over revving of the economy, but the politicians have dithering so parts of the economy are failing; more lubricant and accelerator will only delay another seize a little longer if a full service is not done.

    This is a (private debt currency) deflationary global Depression, not just a nasty recession, and could progress to a hyper-inflationary phase (excessive currency velocity) if enough confidence is lost in the global financial system.

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