Some time ago US News carried an article by James Rickards noting that the tyranny of credit scores and bank intransigence still stands in
the way of a fresh start for millions of people in the US and Europe.
Not much has changed or happened in the meantime.
"Many people can still not sell
their homes because their mortgages are greater than the home value and
banks will not provide relief. Those able to move cannot even get
apartments, let alone buy homes, if their credit scores are impaired.
Employers increasingly use credit scores as a screening device in the
hiring process so that millions of perfectly honest and reliable workers
cannot get jobs if they have experienced temporary distress.
The labor system has become more rigid and sclerotic—specially in Europe—and
will remain so until debt relief and some kind of fresh start on personal
credit scores can be implemented.
Even on moral grounds, it seems difficult to put the entire burden
of adjustment on the debtor. For every imprudent debtor there is an
overzealous and reckless lender. To suggest that creditor greed for
profits and bonuses had nothing to do with the spread of unpayable debt
in recent years is naïveté and not realistic
Banks are not willing to reduce
mortgage principal because they want to retain lucrative mortgage
servicing fees. This behavior is no less reprehensible than that of the
most calculating debtor.
So far in this ongoing global economic crisis, government has facilitated the doomed behavior
of creditors by propping up banks with taxpayer funds and propping up
asset values with printed money.
This levitation act will end with even
more disastrous consequences than if the problems had been confronted
candidly from the start.
Interestingly this economic problem is not new. In fact, it is
ancient. The Bible's book of Leviticus provides that every 50 years all
mortgage debt is to be forgiven. This occurrence was called the
Jubilee Year. This may seem like a shocking imposition on creditors and
a free ride for debtors. Yet, consider the behavioral feedback loops.
In the 10th year after the last Jubilee, lenders might lend freely
for a 20-year term. By the 45th year it seems likely that long-term
credit would have dried up because the lenders were as aware of the
coming Jubilee as the debtors. This was a self-regulating system that
deleveraged itself before credit bubbles grew out of control and
threatened a widespread collapse. It was an orderly deleveraging that
seems enlightened in comparison with the disorderly and draconian
deleveraging our economy is experiencing today.
Maybe our post-modern policymakers and economists should take a lesson from the ancient Israelites. It's time for a Jubilee. ! "
EU-Digest
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