“The Bush administration is hardening its opposition to the chorus of Democrats, bankers, economists and consumer advocates calling for a big-money government rescue program for struggling homeowners.”
(to read the entire article, clink on this link:
http://www.smartmoney.com/bn/smw/index.cfm?story=20080228102127)
The business people I know are probably praising the Bush administration for holding the line. After all, why should people who took on foolish debt obligations be allowed to skip out on them? When irresponsible people don’t make good on their obligations it leaves the responsible people – both debt payers and debt holders – holding the bag. But based on some of my recent reading, I won’t be surprised if the end result of the sub-prime mortgage crisis is some form of wholesale debt cancellation.
On a principled level, the idea of canceling debts seems wrong (provided you believe some governing authority has the right to legalize fractional banking and paper money creation). But from a practical aspect, the lenders – and the government – may have no choice.
In a 1988 book (now out of print) titled “Usury, Destroyer of Nations,” author C.S. Mooney provides an interesting history of debt, from ancient to modern times. In general, Mooney notes that debt follows a regular cycle of expansion then bust. At the point where large segments of the population are destitute and can no longer pay their debts, governments are faced with the prospect of widespread social unrest. And lenders, having repossessed or collateralized every asset and wrung every possible payment from the borrowers, have little hope of squeezing more blood from the turnip. For everyone’s safety, a repudiation of debts solves everyone’s problems – and allows the process to start all over again. Politicians can rule, and lenders can lend because borrowers have some of their collateral restored.
Mooney mentions several ancient examples of debt repudiation, among them:
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The Biblical story of Nehemiah after the Jews had returned from Babylon (for the full story, see Nehemiah 5:1-13)
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The Greek ruler Solon who declared that “all persons enslaved or attached for debt were released, those sold into servitude abroad were reclaimed and freed.”
Some commentators think Solon’s efforts were not a full repudiation of debts, but rather a restructuring. In either event, the attitude of the ancient rulers was the same as today: To maintain order (and keep lenders in business), it may be necessary to occasionally “take a loss” to return things to their “natural state” (i.e., the masses are mollified, the lenders get rich, and the politicians stay in power).
When politicians and lenders fail to heed calls for debt relief it can be disastrous. An unsympathetic Marie Antoinette said “let them eat cake,” and the populace responded with “off with her head.” The ignorance of the czars eventually led to the Bolshevik revolution. The corruption of Batistista (including his acceptance of the Mafia, some of the toughest lenders on the planet) gave Castro the popular support to become a dictator/liberator.
Granted, not all of the reasons for these revolts were exclusively financial. But prosperous people don’t usually resort to civil protest. When financial oppression rises, so does the inclination to violence and revolution.
In addition, the ability of the contemporary governments to arbitrarily print more money makes a bail-out/debt forgiveness plan more likely because it can be disguised. If necessary, lenders can be “paid” worthless paper to project the illusion of solvency. The reality of course, is that no real value has been tendered as repayment; but then again, no real value was loaned by the banks either. In a twisted way, one sham transaction can appear to reconcile the other.
Politicians may not learn all the lessons of history, but they are smart enough to learn the ones they need to keep their positions. Bottom line: If a bail-out makes political sense, it will happen.
Dueling Messiahs
December 10, 2007
December 5, 2007: President Bush is set to announce a plan to help struggling homeowners avoid losing their properties, including a temporary freeze on low, introductory mortgage-interest rates that would otherwise jump higher in the next few years.
http://wsj.com/article/SB119688188491114732.html?mod=djemalert
Headline #2: Clinton calls for subprime rate freeze
December 5, 2007: Senator Hillary Clinton spelled out the details of her subprime bailout plan Wednesday, calling for a 90-day moratorium on foreclosures and a five-year freeze on the interest rates of adjustable rate mortgages (ARMs).
http://money.cnn.com/2007/12/05/real_estate/Clinton_foreclosure_prevention/?postversion=2007120516
BUT WHAT ABOUT US? (You know, the responsible ones)
A letter to the editor in the Saturday/Sunday December 1-2 Wall Street Journal:
If I understand correctly, mortgage lenders, urged on by non-profits such as Acorn Housing Corp., made loans to sub-prime borrowers who had inadequate income to meet their mortgage payments, either from the outset or after the expiration of low initial rates. These borrowers were really only qualified to have less pretentious homes or to rent rather than own. Now, after getting the loans and living in homes they weren’t qualified to own in the first place, they and the non-profits who encouraged them to do so, assert that the mortgage owners or mortgage servicers, such as Citigroup, should accept a loss and enable these borrowers to live in homes they cannot afford. “You loaned me too much money and put me into too good a house; therefore you should subsidize me so that I can continue living over my head.”
As a shareholder of Citigroup, I am supposed to take the fall? The logic and equity of this escape me.
Ebert WeidnerChagrin Falls, Ohio
