10.4 Million American Families Slide Toward Losing Their Homes -- Is It Time for Debt Forgiveness?
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The issue of forgiveness has little traction in mainstream debate, but prospects for action are far more promising than cynics assume. I am convinced that the debt-forgiveness question will eventually move to center stage, if not with this president then maybe the next one. If it is not dealt with, the problem will become larger and more destructive. The politics will change when the public realizes that the economy will remain stagnant until banks are forced to a reckoning and the huge overhang of bad debt is eliminated.
My evidence for optimism is a sampling of authorities from the financial system—banking and housing experts, financial economists, even a few investment bankers—who are already calling for debt reduction. Moral sentiment aside, people who know how the financial system works understand the ugly consequences of doing nothing. The industry advocates of dramatic write-downs are not radicals, but the logic of their position has so far been largely ignored by the major media. Active citizens are spreading the word, however. While Lower Manhattan was being occupied, the New Bottom Line, a coalition of community groups, church folks and other networks, was staging daily clashes with big banks around the country. George Goehl of National People’s Action sees the level of direct action and nonviolent civil disobedience rising rapidly among frustrated people of conscience.
Stephen Roach, a Morgan Stanley economist and lecturer at the Yale University School of Management, more or less agrees. “Some form of debt forgiveness would be a clear positive,” Roach told me. “Debt forgiveness is a big deal when so many Americans are underwater and unable to keep up with their payments. Writing off debts would help them build up their savings. The saving rate is up, but not nearly enough. With debt reduction, people would feel less reluctant to spend money on new things. If you can do that, then companies will feel more confident about future demand, less reluctant about hiring more workers.”
Roach thinks the executive branch can engineer dramatic debt reduction with or without the approval of Congress. Fannie and Freddie together hold something like $1.5 trillion in housing loans or mortgage-backed securities. The Federal Reserve has nearly another trillion on its balance sheet. As owners, they could unilaterally grant new, more realistic terms to stressed borrowers. “Government can do this by simply telling Fannie Mae and Freddie Mac to take a write-down on their outstanding loans,” Roach explains. “Then the government can put pressure on the banks to do the same thing. The banks will resist, but they have to go along if the government is forceful enough.”
The Fed can likewise become a major influence for debt reduction, Roach says. Conservative traditionalists would naturally be appalled if the Fed directly aided the real economy of consumers and producers, but that objection was nullified by the financial crisis, when the central bank pumped hundreds of billions into nonbank corporations like AIG and General Electric.
If the Federal Reserve is reluctant to modify mortgages, says Roach, it can easily fund the process indirectly by creating new money and buying bonds issued by Fannie and Freddie, just as the Fed purchases Treasury bonds. “The Fed can assist by buying Fannie and Freddie bonds with the emphasis on reducing principal for the borrowers,” Roach explains. “It would be like ‘quantitative easing’ aimed at debt reduction,” a reference to the Fed’s purchases of mortgage-backed securities, Treasury notes and other assets to stimulate recovery.
Laurie Goodman, the Amherst Securities housing-finance expert, assured the Senate Banking Committee in September that debt reduction is readily doable in the financial and real estate industries. “We actually know exactly what it takes to create a successful modification: reduce principal, give the borrower substantial payment relief and modify the borrower in the early stages of delinquency,” she said.