10.4 Million American Families Slide Toward Losing Their Homes -- Is It Time for Debt Forgiveness?
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Obama’s bet looked very much like the one Japan made in the 1990s, after its spectacular housing bubble burst. Obama’s failed just as Japan’s did, and for some of the same reasons. Neither nation wished to take on the biggest banks or do something about the mountain of bad debts suppressing new economic activity. If Japan is the yardstick, the United States is in for a long, slow drag of ten to fifteen years. Japan spent a fortune on stimulus in the form of infrastructure spending, which probably helped, since unemployment never got above 6 percent. But its federal debt has risen to more than 200 percent of GDP, and the country is still demoralized by a soggy economy.
“Let me tell you the basic parallels,” says economist David Weinstein of Columbia University. “The United States and Japan both have big debt overhangs as the economies slowed. Both tried fiscal policies, which were probably held back by fiscal conservatives. At least in the Japanese case, that stimulus really was working. The mess in the banking sector fed into manufacturing and many other sectors. Instead of lending, the bankers were trying to reserve that money to cover their losses, trying to hide their losses. All of that was going on.” Like other experts, Weinstein believes there will be a second banking crisis in the United States.
Obama hasn’t changed his failed strategy or relieved the advisers who sold it to him. But the original plan has come back to haunt him. If he tries to act now, he will face a new dilemma: can government act aggressively to force reform and restructuring on the biggest banks without triggering insolvency for some of them? The alternative is to keep bumping along with stagnation or to foster inflation as a way to reduce the value of old debts and ease the pressures on debtors. Either promises bitter controversy. Rob Johnson, the former banker now at INET, thinks government will eventually have to intervene decisively to clear away the rubble and restart the economy.
The country needs a bank holiday somewhat like the one FDR ordered in 1933. “We basically have four banks and two investment banks that now call themselves banks [JPMorgan Chase, Bank of America, Wells Fargo, CitiGroup, Goldman Sachs and Morgan Stanley],” Johnson explains. “These institutions are so intertwined they are a system. You can’t deal with one bank alone; you have to deal with the system. You call a monthlong bank holiday for the twenty largest banks, and that holds everything in place while the regulators mark down the assets and see how everybody’s losses will affect everyone else.
“Then you wipe out stockholders, wipe out management, possibly some of the unsecured debt. Mortgages would be refinanced based on real value. Once everybody has taken their hit and you’ve wiped out existing stockholders, then the government comes in and properly, transparently recapitalizes all of them. As these new institutions gain a footing, eventually they can be sold back to the private market.” This is rough stuff, but the nation could get a fresh start and a new banking system out of the hard knocks. Think Jubilee, American style.