Having said all that, the fact remains that we have this debt and something needs to be done about it. It seems evident that there are no good ideas around in the political and financial circles which have the power to make decisions. I have come to believe that this is due to the fact that they are all wedded to the theories of neoliberal economics. Since that analysis has been shown to be wrong, it follows that one cannot find solutions without abandoning the basic premises on which that system founds. No-one in power at present has the wit to do that, apparently: the very fact that they have given more power to the IMF demonstrates that. The IMF is part of the problem: a big part, so far as I can tell.
In the mainstream press there is more than one proposed solution: and it is clear that even within the narrow limits of plutocracy, and the paucity of possibilities it allows, there is no likelihood of agreement, beyond austerity measures which amount to taking the money from the ordinary people. That won't work because they haven't got it. The bankers and the very wealthy have got it.
If there is doubt that the economic theory which holds sway is preventing a solution, one need look no further than the fact that those nations which do still have control of their currency are not considering different solutions than those which don't. If there were an open minded approach that would not be true, I don't think.
So far as I can see, there is in fact a question as to whether this crisis is about debt at all. I say that because there is a pattern to this crisis: and it does not seem to relate to the things we are told it relates to.
http://epp.eurostat.ec.europa.eu/cache/ITY...02011-AP-EN.PDFIn April 2011 Eurostat produced the figures for both debt and deficit for each of the European countries, including the UK (which is not part of the eurozone). It is interesting to note that the UK had the third largest budget deficit after Ireland and Greece. So Spain and Italy and Portugal were in a better position on this measure than the UK: and yet the pressure was not directed to this country in anything like the same way. One might think that is explained by the total debt figure, and it is true the UK fared better on that measure: but the top three debtor nations were Greece, Italy and Belgium. I have not heard much about the Belgian debt in all of this: I wonder why not. It is also interesting to note that the UK, at 80% debt to GDP ratio, did worse than Spain (60%) and Portugal on this measure too: yet they are seen as vulnerable and the UK is not, or at least not in the same way.
How they are seen is central to this whole debate: because it is how they are seen which determines the interest they have to pay on loans they need to raise: and, as shown above, the interest rate is in fact causing or exacerbating the problems for the nations under threat.
The UK government has adopted a rutheless austerity programme which is in line with the prescriptions of the plutocrats, and is, indeed, the only thing they will accept as evidence that a country can pay its debt. By contrast the "feckless" nations have not adopted such measures or have not carried them through. And this seems to me to be the difference.
If lenders do not believe that the borrower is able to pay its debts they will charge more interest: that is presented as if it was a law of nature. Let us accept that for a moment. If we do, it is reasonable to think that the current position is not the final word: the steps taken to repay the debt are also important. If the lender believes there is only one way to do that then any borrower which is not taking that route will find credit hard to come by. That is understandable. But there is no evidence at all that the views of the lender are correct, and that is the problem.
Imagine that you are an ordinary person who has an income of £20,000 per year. You had reason to believe your job was fairly secure and you needed to buy a house. So you obtained a mortgage: it was higher than you would like because there is a bit of a bubble in the housing market: but you managed to get a loan of £60,000 and that was enough to get you a little flat. Let us say that the interest rate was 3% and so you had to pay £200 a month to repay the capital over the term of the loan: and £150 in monthly interest. Your income is £1666 gross per month and you pay 1/3 of it in tax and national insurance etc. So you take home £1,111 per month and you have £761 per month after you have met your housing costs. You can manage ok at this point.
Let us say that you budget looks something like this:
Power: £100 per month
Food: £200 per month
Car loan: £150 per month
Petrol: £50 per month
Road tax etc £15 per month
Car insurance £30 per month
Council tax: £100 per month
Home insurance £20 per month
Clothes: £20 per month
Total: £685
You have £76 per month uncommitted income from which you need haircuts and repairs/replacements to household items and entertainment and a phone and anything else you can think of: but you can get by. Just.
The next year there is inflation of 5.6% on average. But it happens that power has gone up 18%, petrol has gone up 8%; car insurance has gone up 6%; and food has gone up 10%. Your employer has imposed a wage freeze.
Power: £118 per month
Food: £220 per month
Car loan: £150 per month
Petrol: £54 per month
Road tax etc £15 per month
Car insurance £31.8 per month
Council tax: £100 per month
Home insurance £20 per month
Clothes: £20 per month
Total £728.80
You now have £32 per month uncommitted income and you can no longer get by. So you go and talk to the bank about your mortgage. What you want is a restructuring: that is a reduction in your payments. You suggest that the term of the loan is extended to 30 years because that will bring down your repayments by £33 per month: and you propose to cover the other £11 per month by cutting back on what you spend.
The bank says no. They think that there will be more inflation next year and so your position will be worse then. What they want you to do is get rid of your car. That will leave you in a fine position, vis a vis the loan: you will have an extra £250 a month which means you can easily pay your mortgage and cover your essential costs.
You explain that you need your car in order to work: and they don't care. You are in deficit and they insist that the only way you can meet your obligations is to get rid of your car. They say you should use public transport. You can't do that because it is not just a matter of getting to work: you have to have your car to do the job when you get there. And it is part of your contract with the employer that you provide that car. You tell the bank that: they don't care. They say that if you do not pay the full amount of your mortgage they will take the house off you.
So you sell the car and lose your job. Your income is now £292.50 per month. With no car your outgoings are as before, less the car and the council tax (which you do not now pay as you are on benefit, so the state covers it). You cut back on food and fuel and everything else a bit: so your outgoings now look like this:
Power: £80 per month
Food: £150 per month
Total £230
But you need to pay £350 for the mortgage, and you only have £62.50 left.
What happens to this individual is what happens with austerity measures applied to a country. They throw a lot of people out of work; a lot of businesses no longer have customers; and the tax revenue goes down: so the debt as a proportion of income increases. And meantime the costs go up because the government has to feed the people who no longer have a job. The government ends up with £62.50 with which to pay £350, just as you do.
Now what? Well the bank is quite happy at first: it will sell your house and get its money back. But you are not alone. Loads of people have suffered in this way and so there are a lot of mortgages being foreclosed and the house is no longer worth £60,000. Especially since you could not afford to repair the hole in the roof. Seems the bank is not going to get its money back after all. So what they do now is apply that hard nosed business sense to the problem: and increase the interest they charge you on the loan for the house which is not worth the money you paid for it. You can't pay the current rate: so this is a stupid thing to do. But to the banking mind it is a law of nature, and so they do it anyway.
If you have any sense you now declare yourself bankrupt: that is what a business would do and it is even what the bank would do. If an individual is bankrupt they have to get rid of quite a lot of their assets (including the house) but can keep enough to live an ordinary life: and they have to make an effort to repay the debt during the period of bankruptcy, by passing over what is left after essential expenses are met. So you will pay £62.50 a month maximum: and probably slightly less because the court may determine you have cut back more than is reasonable. But you will only pay that till the debt is cleared: or for the period of the bankruptcy which is usually a year.
So the bank will get: the proceeds of the house and 12 times your monthly surplus: let us say £30,000 +£750.
You will lose the house and have to find rented accommodation which the state will pay for: and have a very lean year before the debt is discharged.
In a sane world, the bank would not insist on the austerity of getting rid of your car: because it ends up worse off. Indeed I think that would seldom happen in the case of a mortgage holder: they would force the sale of the house perhaps, but where the house has lost substantial value even that makes not much sense.
Restructuring the loan is a better option. The bank gets its money over a longer period, but it gets it. You keep your job and with any luck the pay freeze does not last forever.
However it is likely the bank is right and inflation is 5% again next year. Then you will not be able to pay the new structured loan either. Extending the term again makes no sense, for you might not live so long. So another option is the bank has to take some of the loss. As bankers themselves say, they are in the business of taking risk: and if you take a risk sometimes it will end in loss. That is the nature of the beast. A properly constituted bank will have provision for this:and it will not be a disaster for them. So what makes sense is for the whole mortgage to be renegotiated so that you are put back in the position you were in before. You need about £80 left after paying all the costs you are committed to: and so your mortgage needs to come down.
Before you went to see the bank you had £32 left and the shortfall was £44. You have said you can cover £11 of that. So if the bank reduces the value of the house to something nearer its true worth, your repayments on that outstanding balance will fall. Let us say it decides that the house is now worth £50,000. Capital repayments you have to make now will be £166 a month, rather than £200 as before. YOur income is still £1,111 a month: and your payments for essentials are now £316 for the house, and £729 for everything else. You have £66 left and you cut back by £10. That leaves no room for the predicted inflation next year; and you are paying 3.6% interest on the loan, rather than 3% as before. If the interest rate is not increased you have another £25 a month to part meet any inflation next year
Your house is not in fact worth £50,000 this year: the banks were complicit in overvaluing the asset and it was by more than that: so by rights they should write it down to market value, which, as we saw, was £30,000. If it is written down to that figure you will be fine this year and next. If we split the difference, and write the loan down to £40,000 you will still be fine, if inflation is as expected.
One may say why should the bank take this loss, or indeed any loss? The way I see it is this: the bank was partly responsible for the inflated price of the house, through overlending: so they should pay a penalty for that, as it has damaged us all. You, as the borrower, have not put a foot wrong so far: you had no control over asset price and none over the inflation which followed from it. So it makes no sense that you should pay, and every kind of sense that the bank should.
But of course there is an objection: the bank is not using its own money. It magicked the money out of thin air, but once it was lent out it became real:and the real money backing it is pension funds and depositors and shareholders money etc. They were not responsible either. Arguably they should not take a loss. And I think that is correct insofar as it can be avoided. So the new contract should take account of that. And it can. At present your problem is that inflation is eroding your income: but inflation is also going to stabilise the price of houses at a level: and then increase them. So it is perfectly reasonable to provide that when you come to sell the house, any profit over the written down value is used to cover the write down first. That is, you do not make money on the sale till the full amount of the original loan is repaid. The people who provided the money will lose a little because they will lose the interest on that sum: but again that is not a disaster, and it seems that everyone must take something of a loss.
It seems to me that this parallels what is happening with countries: and those countries which are being attacked are the ones who are not willing to sell their car. And that is a direct consequence of the blinkers on the powerful, due to their plutocratic woo.
The objection will be raised that such a strategy will lead to illiquidity and so the financial system will grind to a halt. I don't see that. The transactions suggested are book entries: they do not affect how much money is about. They do affect the balance sheets of the banks, and they might have to raise more money to meet their capital requirements. But if they were nationalised that would not happen: because their current profits would cover some of the actual loss, if loss it be (not convinced): and any shortfall would be made up in the usual way: government would print the money, or guarantee the bank directly.
According to the plutocrats this will not work because the problem is feckess overspending by some countries: but as noted, I see no evidence for that. I think that they are so wedded to their woo that they assume it must be so: and that is not evidence at all
Edited by FionaK - 6/11/2011, 22:17
