In the last couple of years we have seen more than a few attempts to rectify the economic situation in all the countries of the world through stimulus and bailout packages composed by governments with a view to promoting recovery and growth in their nation's finances.
However, the apparently endless succession of these, at the cost of many, many millions, billions, and even trillions, one after the other is, in itself, a testament to the failure of this approach. Because they fail to address the underlying problem dragging our economies down, and that which was the cause of our collective miseries and led to this catastrophic crash......DEBT
.The Unbearable Weightlessness of Capital
As it is, the bailouts that have been attempted so far sought to alleviate the debt the banks had owed each other, and other large creditors... in the hope that this would cause the banks, better positioned in terms of capital, and credit between each other with regards to the cost of borrowing therefore, to lend money to business and individual concerns, and so encourage spending and economic growth...Using the fabled “trickle down effect” whereby a huge sum is said to filter and diffuse among the successively smaller branches of the economic structures.
Of course, we should all know by now that this effect, if it ever truly existed, and was effective in the least, has been subverted over time by those singular interests who have learned to circumvent the lower branches and catch the falling waters of finance from on high, and return them safely to their own swelling pools, while everyone bellow battles in their thirst over the few dribbles that may have escaped by some miracle... and rather than “trickle down”, we are witness to the “trickle sideways, left, right, and even back up... anywhere but down-effect” of the apparently zero gravity economy.Going Up!
So rather than, what I think of as a “penthouse stimulus”, it ought to be evident to all who construct an effective stimulus or bailout package, that an unhealthy, or recovering economy can only be repaired at the lower levels.
Short of simply standing in the street and handing out these millions and trillions in cheques and ready cash (a ground floor stimulus?), the governments should consider aiming their monetary programmes at the mid- level floors in the economy, where the problem really lies:Personal, Individual debt.
This it was that caused the bubble, that caused the subsequent crash, and only when this is dealt with can our economies can truly begin to recover.
You can throw all the money in the word at a bank to lend to businesses (and it seems like they're all giving it a very good try!), but business can only borrow if it can justify expansion and growth, and this can only be if there are customers to purchase goods and services from the businesses, and customers can only do so if they have the money to spend which they can afford to part with, and this can only be so if they are not prohibited from doing so by their debts.
So if a stimulus/bailout is created, it must ease the personal debt burden of individuals that allow them to purchase goods and services, which permit business to borrow, which the banks can help them do by lending because they themselves are seeing more people saving through this easement, and at the very least, less people going bankrupt because of it, which contracts their capital availability and cash flow.Mortgage Equity Liability
And I think have identified the prime debt candidate which holds the very key to this recovery (like acupuncture, you find that one spot which has the greatest systemic effect)...Mortgage Repayments.
It was (over and above the banks buying bad mortgage debt wholesale), the imprudent lending of money to individuals in sums they could not justify based on their income, that caused the economy to crash when it became evident that too many debts where owed in this way, and that relied on the confidence that the price of houses would always go up, making any mortgage a “safe bet” for perpetual profit. But of course, the confidence in the housing market collapsed in light of this precarious situation being revealed, drastically reducing the resale value of so many houses bought by so many people at so high a price, meaning they could only sell these homes (if they could, to a contracting pool of potential purchasers) at a substantially lower sum than they bought them for... the “negative equity” situation.But who is to blame for this situation?
Certainly, this would be the principle argument of those who did not borrow sums they could not afford to buy houses their income could not justify... “why should people who have gotten themselves into this situation be helped out when I was more sensible, and nobody is going to help me?...... And why therefore, should my taxes go to pay for their imprudence?”
Well, like it or not, if you are one such person, you are paying for it anyway, and will keep paying for it over and over again by having your money, paid through taxes, bundled up and given to banks in the form of a bailout to cover their debts as described earlier, or stimulus to businesses which have no customers to justify it...but not one cent of that personal individual debt paid off which is the main impediment to recovery through the ability of individuals to spur growth through spending
We have seen though, that the banks must take a share of the blame for lending imprudently, at rates which bankers of former years would have called insanity, along with the individuals who's blame lies in accepting mortgages they perhaps ought to have known were beyond their means.
But also the governments must take their share of the blame for allowing these other two parties to the bad debt to contract such terms, either by relaxing the regulations which would have preventing the situation, or failing to enforce those regulations that were in place that would have had the same preventative effect.
So the blame can equally be shared between those groups for these mortgages:
- The Bank that lent it
- The Individual who borrowed it
- The Government who let them.
And having established who the responsibility for these errors lie with, it is to each of these that the liability for restitution of the debt must fall equally.
I do not propose simply taking the total mortgage and dividing the liability for the repayments for the whole thing in three equal pieces for each to pay back (in the case of the bank, their section of the liability would naturally not be a repayment, as they are the ones to whom the debt is owed, but a write off of the portion for which they are liable), but rather to determine by how much the mortgage lent was over and above what would be considered a justifiable mortgage loan in a more prudent age, as derived from the borrower's income, and ability to repay, and dividing the difference between these two amounts into three pieces of liability to be shared between these three parties.Let's say a man had an income of 40 thousand (any unit of currency), and an assessment of a more prudent time would have placed a reasonable sum to lend as a mortgage at three and a half times this salary, giving a sum the bank would have been willing to lend at that time, and deemed sensible, of 140 thousand.
If this same man had gone to the bank in the last few years, immediately prior to the crash, this imprudent institution may have lent him up to five times his salary, arriving at a mortgage sum lent of 200 thousand (possible more in some instances) for which he had to repay, to say nothing of interest.
The difference between these two amounts... the 140 thousand (prudent) and the 200 thousand (imprudent), is 60 thousand, which would be the liability to be shared between the three parties.
Meaning that the borrower would have to pay the justifiable mortgage sum (140 thousand), plus a third of the 60 thousand- 30 thousand- in excess of this amount for which he is liable as a recognition of his blame for having accepting such terms, giving a mortgage from which his repayments are recalculated of (140 + 30) 170 thousand.
This would be a reduction of his monthly repayments of 15%, for the duration of his mortgage term, which, while still in excess of his assessed ability to repay based on his income, would reduce the yearly debt burden enough to make a difference in his ability to meet the costs of other bills, and perhaps even allow him ( if he manages his finances carefully from then on) to have more disposable income to spend in the business market place for goods and services... it would certainly improve his chances of not going bankrupt.
The bank, having written off thirty thousand of that excess as a liability for their imprudent lending, do at least retain him as a regular source of revenue through his now more affordable repayments, and not see a total loss through his bankruptcy, and retain the possibility of him being a future customer of their products once his financial situation improves due to the greater likely-hood of a more prosperous state of affairs that this easement of his debt may occasion.
Also, the amount they have to write off is less, due to the other two thirds liability being paid to them from the borrower, and the government.Value For Money
And the government, by repaying their portion of the liability, by “purchasing” that element of the debt, can say to the bank, that there will be no more bailout money for them from the government (from tax payer's money) unless it is paid through this means, ensuring any money they do give to the bank still gets to them, but does something practical to solve the debt crisis and promote growth in the economy as well. Firstly, because as it does the same as an ordinary bailout, in that money passes from them to the bank to recapitalise that bank... but also, it alleviates the personal debt crisis of individuals at the same time, which would otherwise have had to pay those individuals in benefits once they are bankrupt, and many more besides, as they contribute to the declining economic situation of having less customers in the market, businesses which may dissolve as a consequence, and so on, and so forth.So basically, this method has double value and more for governments, compounding bailout, stimulus, and potential benefit payments to citizens in to one initiative at the proportionately fractional cost of the what the sum of those elements would individually add up to... and alleviating the tax burden on all citizens as a result
(This also has the advantage over normal bailouts of being paid to banks as the repayments on the mortgage are met in regular monthly smaller installments, rather than heaving a huge blob of cash in one go... so it is a controlled release bailout more managable for government finances)