Radical action an option? Mortgage amnesty

greyed

So I believe from reading the threads here that there is consensus that there are really two paths to take regarding our economy, if you'll allow me to summarise...

The current path, which may only be sustainable with renegotiation of the current deal as I think we all agree we simply cant pay in its current form. We adhere to the status quo and prop up banks, but this is looking increasingly precarious every day.

The radically different path, by radical I guess I meant some form of default/restructure, perhaps radical may even be too soft a word. Something I was discussing today (over breakfast :pac:) seemed to make this option a little less painful, but as I am not an economist and not knowledgable enough (who is these days though, eh?), this may be a pie in the sky, so I thought id propose it here, what are your opinions on a mortgage amnesty?

This (rough) idea is in the context of banking default, i.e. seperate that cancer from our finances and let them reap their own rewards. Since the state owns many banks and parts of others we would essentially own all the mortgages in the country bar those with untouched TSB. How about announcing the everyone in the country now owns their own home and no longer has mortage commitments. Yes, the banking system would be decimated, but so what, its pretty much ****ed right now. Of course we would need a day to day banking system - seperate domestic retail banking and assets a la Iceland and place them in a state bank, perhaps labour's SIB. As for the shortfall in public current accounts, our public sectors accounts for large proportions of this spending - progressive wage cuts, significant ones but hopefully less painful due to the lack of the burden of a mortgage. This freedom from debt for many in the country will allow for more consumer spending (margin determined by pay cuts of course). On top of this our sovereign balance sheet will look a lot fresher, give some room to breathe. The thought was that the amnesty could be a shock absorber for the default - in allowing for wage cuts, and perhaps something of a stimulus.

Of course, this would be highly unfair on the likes of TSB, they would have to be accomodated. They could be rewarded with a prominant new position in banking (perhaps the new home for accounts of decrepid banks) or even become the state bank itself. Other banks not fully in public ownership could be reimbursed for the value of their mortages balanced against the amount of state funds they received.

The property market would certainly be effected in some manner, but I cant say whether it would be positive or extremely negative. Prices fall because there is no demand, and people with a house arent looking to buy anyway. Surely if there is no more houses being placed on the market due to repossesions, the prices might stabilise, or at least slow decline by not adding to the surplus stock. Of couse everyone who wants a house doesnt have one at the moment - there is still a market, but with cuts in wages, market deflation could be an alternative outcome.

Now, for the legality of it... Im sure it may be illegal and 'unfair' in many regards but the precedent has been set here, "our" bailout is nothing but illegal and unfair. This is not me being a radical socialist, the bailouts are clearly in direction contravention with european law.

The reprecussions for other european countries could be hard hitting, I am wondering how much so. If anyone could enlighten me on that regard, would it be morally prohibitive? If this course of action was taken, it would most likely result in the rescinding of european financial support, so whether an massive 1 year adjustment is advisable is another matter to consider, perhaps the IMF could provide a smaller loan.

To be honest, I feel a little stupid tying this out, its armchair economics most likely, is it stupid? :pac: The suggestion may be ridiculous, but so are our economics circumstances.

Fol20

greyed wrote: »

is it stupid?

In one word yes.

Me thinks you have a house that is in massive neg equity and you would like to avoid paying back.
Secondly your basically giving all of the investors who bought houses a get out of jail free card for their very risky investments.

greyed

Fol20 wrote: »

In one word yes.

Me thinks you have a house that is in massive neg equity and you would like to avoid paying back.

No, I am a student, I dont own a house and the family home is not in negative equity.

Fol20 wrote: »

Secondly your basically giving all of the investors who bought houses a get out of jail free card for their very risky investments.

As opposed to bankers, who did exactly the same thing with far greater magnitude and recklessness? They are getting their card funded by us, including those in negative equity. Its breaking the country and resolving nothing. I would far prefer to bailout homeowners (irresponsible or otherwise) than the institutions which caused the crisis with nothing but profit in mind - espeicially is the price tag is FAR cheaper.... http://businessetc.thejournal.ie/banks-may-need-another-e25-billion-recapitalisation-2011-03/

I am looking for economic reason here, not conservative dogma.

hmmm

Gadaffi did something similar, to "solve" a housing crisis in Libya he simply said that everyone who was renting a place now owned it. Simples

There are two problems with your proposal:
1. Many people don't agree that our debt is unaffordable. I know the media says it is, but if you do the numbers it isn't. I don't rate the economic literacy of our politicians or media who are too lazy (or to ignorant) to try and understand - these are the same people who rely on stupid slogans such as "rent is dead money" and "you'll never go wrong with property".
2. In a default, someone has to pay. The losers are the bondholders, who in many cases are Irish individuals, pension funds, life assurance companies etc. For every mortgage you write off, someone else is suffering a loss. Most defaults aren't chaotic, they tend to be either forcing bondholders to accept a haircut on debt or an agreement to repay debt over a longer period - I could go on about the consequences of a 100% default but it simply isn't going to happen so I won't. So while it would be nice to say "all debts in Ireland are cancelled", at the same time you would have to say to people who are retired that "your pension is gone", or say to people with life assurance that "your family are getting nothing" or to people saving for their pensions that "your balance is zero".

It would be a massive transfer of assets from savers to debtors - there is no such thing as free money, someone somewhere always has to pay. Imagine the implications for the future in Ireland, no-one will lend us money, and banks will demand huge mortgage interest rates for fear that we will repeat the exercise in the future. It's a short term solution that causes long term pain.

RichardAnd

greyed wrote: »

As opposed to bankers, who did exactly the same thing with far greater magnitude and recklessness? They are getting their card funded by us, including those in negative equity. Its breaking the country and resolving nothing. I would far prefer to bailout homeowners (irresponsible or otherwise) than the institutions which caused the crisis with nothing but profit in mind - espeicially is the price tag is FAR cheaper.... http://businessetc.thejournal.ie/banks-may-need-another-e25-billion-recapitalisation-2011-03/

This is something I've heard paraphrased many times over the last few years. Yes, bankers were bailed out and yes dodgy banks like anglo are now being propped up when in a fairness they should fail, that was wrong. However, relieving "ordinary" people of mortgages that they willingly took out would be wrong too and two wrongs don't make a right.

Besides, someone somewhere will have to pay.

greyed

hmmm wrote: »

Gadaffi did something similar, to "solve" a housing crisis in Libya he simply said that everyone who was renting a place now owned it. Simples

There are two problems with your proposal:
1. Many people don't agree that our debt is unaffordable. I know the media says it is, but if you do the numbers it isn't. I don't rate the economic literacy of our politicians or media who are too lazy (or to ignorant) to try and understand - these are the same people who rely on stupid slogans such as "rent is dead money" and "you'll never go wrong with property".

If it isnt too much trouble, could you provide a brief rundown of the numbers and your interpretation of them? After the most recent stress tests we could have to throw in another 25bn, history repeating itself and it may well do again... how do you see this as sustainable? If the entire banking package is drawn down, we will be left with public debt of 120%, the interest on which is punative.

We cant borrow privately anymore, we are risky apparently because of the method we are employing to eleminate the risk involved in lending to us, its a bizarre and ironic situation and I dont see how it can lead us to any sort of resolution. I dont have to tell you any of this, you are well aware. I can be pragmatic and disregard enraging injustice of it all if the current solution is in fact a solution, but I cant see this solving our problem, how do you? Genuine question.

CiaranC

So everyone who bought into the bubble gets a free house. What do those who didnt buy into it get?

hmmm

greyed wrote: »

If the entire banking package is drawn down, we will be left with public debt of 120%, the interest on which is punative.

Even in that scenario, and even if we paid a huge 10% rate on our debt, we'd still be spending only (err "only") 12% of our national income on debt repayments. The last time I looked at the figures it was going to be slightly higher than 120% but it doesn't make a huge difference. 12% of national income is not unsustainable, plus you would hope that you could get interest rates back down to more normal levels as the crisis passes and as we get our deficit back under control. Repayment of the capital value of the debt is a red herring, few countries ever repay their national debt.

The problem is the deficit and whether we will cut government spending or hike taxes to cover the new debt interest costs. A 4% cut in the last budget in social welfare is seen as incredibly harsh and monstrous, so the required 30% cut is of course going to lead to people saying we can't afford it. Of course we can, it just won't be pleasant.

I've seen some commentators say that if private debt is included, as a nation we cannot afford repayments. They talk about figures like 200/300% of GNP. Again the figures are scary but not unsurvivable - remember individually any of us with mortgages are already carrying debts of upto 300 or 400% of our income.

Dannyboy83

Your proposal is basically as follows:
Several of the suburbs in that city are on fire, so we should just burn the entire city down.

Besides, that idea rewards all consumers who were reckless and availed of an unaffordable mortgage, while punishing all who were responsible and did not.

It's unfeasible.

gigino

greyed wrote: »

How about announcing the everyone in the country now owns their own home and no longer has mortage commitments. Yes, the banking system would be decimated, but so what, its pretty much ****ed right now.

your suggestion would mean those who saved for years or decades putting their life savings in the financial institution, perhaps for their retirement or old age or nursing home or for their kids education, or for a rainy day, would see those savings gone

now, if you had suggested those who borrowed over say 300k between 2004 and 2008, but who had paid 20% of it back, could get their outstanding loan reduced by say 20%, that would not be such a madcap idea, but still there would be a lot of moral hazard...and where / how do you draw the line etc

greyed

CiaranC wrote: »

So everyone who bought into the bubble gets a free house. What do those who didnt buy into it get?

If they've a mortgage, they get it lifted. If they dont, they may get to keep their job due to a bit more money floating around.

Dannyboy83 wrote: »

Your proposal is basically as follows:
Several of the suburbs in that city are on fire, so we should just burn the entire city down.

Besides, that idea rewards all consumers who were reckless and availed of an unaffordable mortgage, while punishing all who were responsible and did not.

It's unfeasible.

Nothing about the current process is fair, nothing about an amnesty would be either. I am asking about this in the context of a banking default, in such a case the banks would be rendered useless and collapse, the state would own the mortgages and its matter of deciding to allocate those funds to expenditure through a new bank or simply let householders spend instead, assuming they dont save of course. I am asking this so that people can poke holes in it btw, and it seems there are quite a few holes alright :pac: I want to be informed, I am not arguing for this. Im just throwing an extreme suggestion out there as we are in rather extreme circumstances.

hmmm wrote: »

Even in that scenario, and even if we paid a huge 10% rate on our debt, we'd still be spending only (err "only") 12% of our national income on debt repayments. The last time I looked at the figures it was going to be slightly higher than 120% but it doesn't make a huge difference. 12% of national income is not unsustainable, plus you would hope that you could get interest rates back down to more normal levels as the crisis passes and as we get our deficit back under control. Repayment of the capital value of the debt is a red herring, few countries ever repay their national debt.

The problem is the deficit and whether we will cut government spending or hike taxes to cover the new debt interest costs. A 4% cut in the last budget in social welfare is seen as incredibly harsh and monstrous, so the required 30% cut is of course going to lead to people saying we can't afford it. Of course we can, it just won't be pleasant.

I've seen some commentators say that if private debt is included, as a nation we cannot afford repayments. They talk about figures like 200/300% of GNP. Again the figures are scary but not unsurvivable - remember individually any of us with mortgages are already carrying debts of upto 300 or 400% of our income.

This would leave us in a precarious situation, no? Greece has endemic problems, sure, but it was also starting out in the crisis with massive debt, some of it maturing, and it was the first to buckle. Italy has been viewed with skeptic eyes for years due to its debt. It may be survivable, but without a borrowing buffer, is it sustainable?

FISMA

CiaranC wrote: »

So everyone who bought into the bubble gets a free house. What do those who didnt buy into it get?

+1 good question.

To the OP and in general.

You cannot reward bad behaviour and punish good behaviour indefinitely.

One of the fundamental problems I have with the Irish taxation system: it punishes those who make money and rewards those that do not. The only way such a system survives is on FIAT and inflation.

Now we want to reward those who did not see the bubble growing? Those that could not look at a few simple trend lines and see that the growth was ridiculous and unsustainable?

Sorry, I disagree. Caveat emptor.

greyed

FISMA wrote: »

+1 good question.

To the OP and in general.

You cannot reward bad behaviour and punish good behaviour indefinitely.

One of the fundamental problems I have with the Irish taxation system: it punishes those who make money and rewards those that do not. The only way such a system survives is on FIAT and inflation.

Now we want to reward those who did not see the bubble growing? Those that could not look at a few simple trend lines and see that the growth was ridiculous and unsustainable?

Sorry, I disagree. Caveat emptor.

Fair enough. Point accepted, however we are doing just that at the moment, punishing taxpayers (prudent or otherwise) and rewarding bank executives.

FISMA

greyed wrote: »

Fair enough. Point accepted, however we are doing just that at the moment, punishing taxpayers (prudent or otherwise) and rewarding bank executives.

I am not one for rewarding the bankers.

Part of business is making money, the other part is losing money.

What the US and EU has done is effectively privatize profits and making public losses.

That's not capitalism.

That's not the free market.

Inherent in both is risk and the subsequent consequences.

3DataModem

The government are supporting the banks because they believe a stable banking and currency system is important to the country as a whole.

FISMA

3DataModem wrote: »

The government are supporting the banks because they believe a stable banking and currency system is important to the country as a whole.

I agree that the gov't needs to support the banks in some way.

However, that's not to say that they should give blanket amnesty to all criminal acts.

Surely, a few bankers could be prosecuted while simultaneously putting a backstop to the banks.

Red Actor

hmmm wrote: »

Even in that scenario, and even if we paid a huge 10% rate on our debt, we'd still be spending only (err "only") 12% of our national income on debt repayments. The last time I looked at the figures it was going to be slightly higher than 120% but it doesn't make a huge difference. 12% of national income is not unsustainable, plus you would hope that you could get interest rates back down to more normal levels as the crisis passes and as we get our deficit back under control. Repayment of the capital value of the debt is a red herring, few countries ever repay their national debt.

The problem is the deficit and whether we will cut government spending or hike taxes to cover the new debt interest costs. A 4% cut in the last budget in social welfare is seen as incredibly harsh and monstrous, so the required 30% cut is of course going to lead to people saying we can't afford it. Of course we can, it just won't be pleasant.

I've seen some commentators say that if private debt is included, as a nation we cannot afford repayments. They talk about figures like 200/300% of GNP. Again the figures are scary but not unsurvivable - remember individually any of us with mortgages are already carrying debts of upto 300 or 400% of our income.

The figure is fast approaching 100% - before the banking debt is included. Figures last week suggests another 100% for the banks. Comparing the national debt to a mortgage and its multiples is faulty as 100% of your (after tax) income is available to you whereas the national income is not available to the Government - only about 30% or €35bn. A debt of €250bn @ 5% (after we get the 1% discount) plus the social welfare bill means 90% cut in pay to pay guards, teachers, nurses and the army who would then be required to impose a curfew. Oh and by the way all other government spending would also cease. So the debt is not manageable in my view.

hmmm

Red Actor wrote: »

Comparing the national debt to a mortgage and its multiples is faulty as 100% of your (after tax) income is available to you whereas the national income is not available to the Government - only about 30% or €35bn. A debt of €250bn @ 5% (after we get the 1% discount) plus the social welfare bill means 90% cut in pay to pay guards, teachers, nurses and the army who would then be required to impose a curfew.

That's the choice for society to make - we can decide to pay ourselves high social welfare rates, we can decide to have highly paid public servants and we can decide not to tax the citizens enough to repay our debt, or we can live within our means and repay our debt. The former option is not available to us because other countries are not willing to pay for it, I don't think most Irish people have copped this yet.

Seth Brundle

FISMA wrote: »

I agree that the gov't needs to support the banks in some way.

However, that's not to say that they should give blanket amnesty to all criminal acts.

Surely, a few bankers could be prosecuted while simultaneously putting a backstop to the banks.

What evidence of criminal acts is there? What charge are you proposing to prosecute the bankers under?

Tea drinker

3DataModem wrote: »

The government are supporting the banks because they believe a stable banking and currency system is important to the country as a whole.

I might be wrong, but I think they are supporting them because they already put so much money into them. If the banks had been honest bak in 2008-9 then there would have been no banking guaruntee, as it would obviously be cheaper to wind them up and let foreign banks in. More evidence of fraud while the Gardai yawn, the "judiciary" remain obediently silent

FISMA

kbannon wrote: »

What evidence of criminal acts is there? What charge are you proposing to prosecute the bankers under?

kbannon,
I am unsure as to the purpose of your question.

Do you honestly believe there is not one banker that broke the law?

Dannyboy83

FISMA wrote: »

kbannon,
I am unsure as to the purpose of your question.

Do you honestly believe there is not one banker that broke the law?

His purpose is straightforward.

Lots of people come on here, indignant with rage (as I did myself originally) that nothing has been done to prosecute the people who engaged in such reckless behaviour.

The problem is, wheter it's due to our own ineptitude or the slipperyness of the people involved (probably both) - there doesn't seem to be much we can prosecute them for.

Everyone is in agreement that their behaviour has been unethical.
Nobody is able to point out where it has been criminal. i.e. it seems we are not able to pinpoint specific laws that have been broken in specific cases with regard to specific individuals.

The Ivor Callely case is a good example of how it can backfire on us.

Seth Brundle

FISMA wrote: »

kbannon,
I am unsure as to the purpose of your question.

My questions weren't that complex and were in reply to your comment.

FISMA wrote: »

Do you honestly believe there is not one banker that broke the law?

What I believe is irrelevant really as I'm not a court of law.
A proper court would require a specific charge for those who come before it and in order to find someone guilty they would need some form of evidence.

FISMA

Danny and KBannon,
I think it is clear that bankers and financiers broke the law.

My question to you was an attempt to ascertain whether or not you felt the same. I am not trying to be combative. However, if you truly believe that no-one broke a singular law, there's nothing to say as I doubt there is anything that could change your mind.

I am sure a case could easily be made for: fraud, tax evasion, cooking the books, and a host of other offences.

The problem, as I see it, is that there is a bit of a catch 22.

Go after the banks and the economy falls further into chaos.

Charge the bankers with small offences and they will receive small penalties - adding insult to injury.

In my humble opinion, the Irish government lacks the political will to prosecute bankers and financiers.

But again, please do not imply that there isn't one law these bankers could be found guilty of breaking.

If Ireland cannot find an Irish law they broke, then pass it off to the EU.

If the EU cannot find an offence then pass it off to the Brits.

It is highly probable that their offences showed up in London, hence they could be charged under UK law.

As a last resort, call the yanks, the could clean house under Sarbanes Oxley.

Tea drinker

They frequently broke the liquidity limits .
They made fraudulent reports to the state who subsequently bought them.
It's well know that they were the most reckless of all the banks in British isles, maybe in EU... does this count as fraudulent operation?
Of course the regulator, native and foreign snored loudly during this caper.
Hardly surprising it's impossible to rouse them from their slumber now, they'd only be hanging themselves.