Have you ever gone to a gig so ridiculously funny that you can’t actually communicate with the person beside you? You are reduced to grimacing; words just can’t come out, tears and snorts, yes, but words, no. When I finally pulled myself together at Tommy Tiernan’s latest show in Vicar Street, it struck me that Tommy might not realise this, but he has a lot in common with mainstream economic thought.
Tommy Tiernan, Franklin D Roosevelt and the IMF have something in common: they all want the small homeowners to get debt relief of some sort.
Tiernan’s brilliant take on the present debt crisis can be seen on YouTube. It’s a pretty blunt form of permanent debt repudiation but, that said, it is not a million miles away from what the IMF suggested last week.
The IMF call for exploration of debt forgiveness for the average indebted household revealed that the IMF is miles ahead of the ECB. It may be time to begin the process of dealing with the IMF on its own, if that is possible.
The IMF, after all, has been dealing with bankrupt countries for decades, it has seen all this before and it is now helping the Icelandic government to implement debt relief. The results in Iceland are promising.
The IMF deal in Iceland is part of an established tradition in economic history. Debt relief after a credit boom is not radical; it is mainstream. What is in fact radical is the ECB position that debtors uniquely shoulder the burden, rather than creditors and debtors together.
It is interesting in this crisis how the radical has become mainstream and the mainstream is labelled radical.
At the height of the Great Depression, the great President Roosevelt, in his message to Congress, stated that it was his objective to “relieve the small home owner of the burden of excessive interest and principal payments incurred during the period of higher values and higher earning power”.
In the summer of 1933, he embarked on a most comprehensive programme of debt relief by setting up the Home Owners Loan Corporation (HOLC) to buy mortgages from banks. The government exchanged bonds for these mortgages. It then restructured the mortgages, writing off significant amounts of principal. In all, one million US mortgages – or one in five of all mortgages – were restructured.
Starting in 1933, the HOLC bought up mortgages and then it waited and, over time, as US conditions improved, it sold the mortgages back to the banks because they were now performing. As they got back on track, Americans who would have been kicked out of their houses, paid back their mortgages and the HOLC was eventually wound down in 1951.
The main reason to intervene to give debt relief to homes which have far too much debt and far too much negative equity is that it helps the economy to recover. Last week’s IMF study revealed what we all knew in our guts, which is: if you have too much debt, the economy won’t recover and the recession will go on and on and on.
The IMF study, which looks at episodes where other countries have got into a similar mess, shows that, in all cases, the two most significant elements that drag recovery is the debt-to-income ratio and the fall in asset prices. So we can see that the crisis is not the cause of our problems, but the consequence.
Ultimately, the more debt there is the faster the fall in house prices. This contracts demand, income and employment, and then defaults start.
Our debt-to-income ratio is among the most delinquent in the world at more than 100 per cent.
This means that, when things start to tighten, there is far too much debt to pay. Debt of more than 100 per cent means that the growth of the economy has to be at least as much as the prevailing interest rates, otherwise the debt ratio explodes. AIB’s website tells me that a personal loan would cost me 9 per cent APR (that seems very expensive). So with debts at 100 per cent of GDP and the economy actually shrinking over the last two quarters, the debt burden is not payable. The IMF found also that the fall in house prices makes us feel much less wealthy, and this has an impact on the willingness to consume.
Real house prices in Ireland have fallen faster and farther than anywhere else. Contrast the fall in Irish houses prices with that of Iceland and you can see that the introduction of debt relief in Iceland has cushioned the fall in house prices.
What is the upshot of all this? If there is no relief, arrears and defaults will simply rocket up of their own accord. The rate of default is now accelerating faster in Ireland than anywhere else in the world.
This column has argued for debt relief for years now.
Normally, the reaction of people who don’t have debt is to argue that it’s not fair if others are bailed out. That is the moral hazard argument. I am more concerned about real hazard than moral hazard, and real hazard is chaotic default all around the country by thousands of people.
This is what will happen if we don’t have debt relief.
But the question is: who pays?
This is where there is light at the end of the tunnel. But in order for a clean and relatively cheap programme of debt relief to be set up, we’d have to get the Central Bank to create the money. Can we do this? Surely we can’t?
Yes, we can. In fact, that’s what the entire promissory note palaver is all about. The dirty little secret that the ECB doesn’t want to share with us is that the eurozone is actually out of control. Because of something called “emergency lending assistance’, each country can print what it wants.
So the government here issued a promise – the promissory note for Anglo. It gave that to the Irish Central Bank. The bank gave it cash. Where did the cash come from? They made it up. They just printed it. The government then owes the Central Bank. For details on this, see this excellent occasional blog.
If this can be done for Anglo, why not for people’s mortgages?
Why not create a big promissory note to cover half the cost of debt relief? Let the banks own a share in the house, so they have equity. But it wouldn’t be the banks that own it really, it would be the state because we own the banks. Make the promissory note for 30 years.
In that ensuing 30 years, the price of houses rises eventually.
The punters sell the houses, the equity goes to the banks which owe the money to the government, which owes the money to the Central Bank.
Would the ECB allow this? If you did it, what could this institution actually do? Nothing. That’s the big lie. There is nothing it could or would do.
Maybe Tommy Tiernan was right after all.