Page 2 of 2
The reason we apparently do not adopt this alternative approach is because the banks wanted to avoid price discovery on their “legacy assets” by all means possible. They do not want the world knowing how many toxic assets they really have on their books and certainly do not want to illuminate the scale of these losses (which might show them to be effectively insolvent), as this would expose the TARP recipients to receivership and restructuring via the FDIC, thereby breaking up their power once and for all.
Given current realities, an FDIC style reorganization and restructuring will not happen, barring a secondary relapse in economic activity. Which might leave the American public to take matters into their own hands via outright debt repudiation. There is a reason why there was a historical tradition of debt jubilees every 50 years and usury laws.
Maybe inflation is the modern version of these two tools to manage the effects of the dead hand of the rentiers, albeit in a more incremental fashion, but outright debt repudiation is more likely today, given the absence of any kind of inflationary pressures.
In many respects, the Argentina example of 2001 is instructive. True, the economics are not completely analogous here because Argentina repudiated foreign debt to get out of an externally imposed debt inflation, whereas here we are discussing the crushing burden of domestic debt on the part of the US household sector. Still, in many ways, the ultimate effect is the same and Argentina’s repudiation could well have the implications for the US, were American households to embrace a similar tactic. After Argentina abandoned the dollar peg, the peso collapsed, leaving the country with a horribly burdensome deflationary foreign debt repayment program foisted on it by the IMF (yet again making the world safe for US investment banks at the expense of everybody else) as a condition for further economic assistance.
But then President Nelson Kirchner threatened to forego debt repayment to the country’s foreign creditors in the event that the IMF continued to insist on being repaid in a manner which was deflating the country into the ground.
In effect, Kirchner called the bluff of the IMF and he won. Argentina repudiated its debts and immediately started to grow again, led by exports from a vastly depreciated peso. The IMF continued to insist that Argentina would remain cut off from the foreign debt markets whilst the country refused to repay its foreign debts. But the threat was exposed for the hollow one it was, the reality was that Argentina didn’t need to subject themselves to the poisoned chalice which the IMF was offering as a condition of obtaining yet more foreign credit.
(As an aside, a government’s ability to spend and service its debt is only unlimited if the payments are made in the government’s own sovereign currency, which makes the whole notion of Argentina borrowing in dollars thereby adding an unnecessary external constraint on growth nonsensical as a future growth strategy.)
By the same token, if the American household sector repudiates debt by living in the house without paying a mortgage, until the sheriff shows up and then paying rent once they get kicked out, banks will then do what shut new credit off to the private sector? Already done. In the meantime, the household sector (like Argentina when it repudiated its foreign debt) will have just increased the discretionary income and wiped the liability side of its balance sheet. Then it is just a matter of Mr. Geithner figuring out another way to stress test the banks back into Treasury Department seals of approval, and voila, presto change!
Or maybe a debt repudiation of the magnitude we envisage might force President Obama to stop diddling around with the Rubinite wing of the Democrats and embrace an approach which prevents US households from losing wealth of an amount equal to the negative equity they have in their respective homes, while the banks write down their assets to market.
Ironically, by overplaying their hand, the banks might be forcing the households to adopt an approach that will ultimately weaken the banks and expose them as the emperor with no clothes. They will take huge hits to their capital if faced with widespread debt repudiation. Now, I expect you’ll get a host of lawsuits and the very essence of the law of contract will come under attack if this scenario occurs, but the average American household might feel he has no choice and Obama might accommodate himself to these populist winds as he did in the Chrysler case, in effect overturning years of established bankruptcy law with no particular political cost to himself. At the very least, the more effectively people create a sense of urgency and crisis via these kinds of actions, the easier it will be for the President to push for progressive legislation, which overturns years of destructive policy making and finally delivers the change that many of us thought we were voting for last November.
Marshall Auerback is a market analyst and commentator. He is a brainstruster for the Franklin and Eleanor Roosevelt Intitute. He can be reached at MAuer1959@aol.com
Posted by (Bulatlat.com)
