Friday, March 06, 2009

An Ancient Solution - Just Cancel the Debt

There are numerous sins and innumerable follies on which the collapse of the financial world and the global economy could be blamed. None of them, incidentally, have any connection to free enterprise or a shortage of legislation. The solution, on the other hand, has everything to do with the free market and the removal of harmful, monopoly granting legislation.

As it turns out, the free market could solve the crisis without any stimulus from Congress, if it was simply allowed to operate without additional crippling legislation. The situation in a nutshell is that foolish borrowers over-committed themselves, incurring debts that would take the rest of their life to repay. Greedy bankers illegitimately created the principal, hoping to receive interest on money for which they did not labor. Of course, God is not mocked. Only the Creator can create ex nihilo. The money created out of nothing disappeared even faster than it was created, taking with it the hopes and dreams of those whose wealth was built on it.

As Michael Hudson notes, Lehman's mortgages were trading at 22 cents on the dollar before it was nationalized, meaning that people were buying the notes for less than a quarter of what the loan originator paid in funding the loan. So with no intervention, Lehman Brothers loses lots of money, their employees don't get their bonuses and the company goes bankrupt. Yes, investors will lose money; but life and the economy will go on. Enron's bankruptcy, while destroying investor confidence in the veracity of CEO's and accounting firms and wiping out those who were over-invested in its stock, had little negative impact on the overall economy.

The benefit, on the other hand, of allowing the free market to buy these "toxic" notes at steep discounts (i.e. 80% or more) is that the new owners of these notes can go to the foolish borrowers and cut their mortgage by 75% turning a $400,000 mortgage into a $100,000 mortgage or a $100,000 mortgage into a $25,000 mortgage and not have lost a penny doing so. With a much lower loan, many of the foolish borrowers might have a reasonably good chance of paying their mortgage or at least selling their home for the value of the mortgage. Property prices would fall, making home ownership affordable for more people and gradually restoring demand for housing. Since many lenders will have lost their shirt, loans will be much harder to get, thereby slowing the creation of a new bubble. (To prevent a new bubble, existing laws granting monopoly power to some corporations to create new money must be repealed.) This could all happen without any help from Uncle Sam and without further impoverishment of taxpayers. And, it puts the burden on the those who should rightfully bear it- those who unjustly profited by the illicit creation of money in the first place.

This solution is outlined in this delightful interview with Michael Hudson. Thanks Mom for bringing it to my attention.