Wall Street Journal: National bankruptcy may be a solution to the US economic problems

Wall Street Journal: National bankruptcy may be a solution to the US economic problems Want to solve the economic crisis? Want to get people back into employment? Want to stimulate economic development...

Want to solve the economic crisis? Want to get people back into employment? Want to stimulate economic development?

Here is a solution. Quick results. Relatively simple and easy to do.

However, you won't like this method. You won't like it.

Breach of contract. Debtors across the country are filing for Chapter 11 bankruptcy protection.

The quickest way to resolve this mess is for the tens of millions of homebuyers across the country to stop paying their mortgages and other debts, and then for millions more to file for bankruptcy.

I said, you won't like this method.

I don't like this method very much either. It's certainly not an option for people to borrow so much money and not have to pay it back.

But, do you know? The best time to avoid this outcome was five or ten years ago, when the money was loaned out.

Now, the good opportunity has passed.

Nationwide bankruptcy is by far the least objectionable way to solve these problems.

This is because the root cause of the economic downturn is not too much or too little government intervention in the economy, not bureaucracy, too high or too low tax rates, the widening gap between the rich and the poor, too much or too little government debt, not companies or the poor, nor "greed" or "socialism", nor is it a problem in China or Greece, nor is it the legalization of same-sex marriage. In short, the opinions of various "brick experts" are wrong.

The reason is debt, stupid.

We are already deeply in debt and much more. If debt is like a big lake, we are at the bottom of it, and we are tied to an anchor at the bottom. Currently, the total debt of all U.S. households has reached $13.3 trillion. In one generation, this number has tripled. In the past 11 years, this number has doubled. We are currently more indebted than any country has ever been. While it's common to hear tirade that balance sheets are improving, this is not the case. Compared with the peak four years ago, people's total debt is only 4% lower.

Many of these debts were written down.

More than a quarter of mortgages in the United States have loan balances greater than the market value of the home. The market value of many houses is significantly less than the loan balance. In states like Nevada and Florida, the total amount of such loans is simply astronomical.

The key thing to understand is that, as a fund manager friend of mine said, the money has "went to heaven." In other words, most of these debts will never be repaid in a real sense. Not at all.

Think about it, what would companies do if they encountered this situation?

This kind of thing is common. If banks and bondholders lend money to a company, say, $1 billion, and later discover that the company is only profitable enough to repay $300 million. What happens next?这家公司还会信守承诺去偿还这永远无法还清的10亿美元债务吗？ Will shareholders return the dividend checks they already received to the company? Will they sell their homes to pay off the company's debt?

Absolutely impossible. The company will file for bankruptcy protection under Chapter 11 of the Bankruptcy Code. Creditors honestly admit their mistakes, accept their losses, and then fix the problem. They would write down those loans and accept equity in their place. As a result, the balance sheet looked brand new, and the company began to operate normally again.

Why don’t homebuyers do this?

Most objections have good intentions, but are inaccurate.

I asked one fund manager and he said this leads to what is called moral hazard. He asked: If it is no big deal for someone to see others not repaying their mortgage, why should he repay it himself?

My answer: Although Lehman Brothers defaulted, General Electric (GE) and Verizon did not default accordingly and are still paying interest on their bonds. The rationale behind this is the same. You want to keep your credibility, you want to keep your equity.

If the company defaults, its shareholders will face heavy losses. If a person who borrows a loan to buy a house defaults, the bank will repossess the house. I want to keep my house and not lose my savings and credit rating. Most people would think so too.

Some people would say that this will have a very terrible impact on the financial system. However, banks must face reality no matter what. The prices of the collateral they hold have fallen to very low levels.

Someone may ask, "Why don't those who borrow hastily bear any responsibility?" My answer is: "Why don't those banks who lend hastily bear any responsibility?"

Asking people not to borrow money makes no sense. People cannot change their habit of borrowing money. I've never met a Wall Street executive who would turn down an interest-free loan. I have never seen a company say at the time of its initial public offering (IPO): "Don't give us so much money!" People like money and want as much as they want.

In a free economic system, the lender is responsible for reasonable lending. Banks should exercise prudence and responsibility when making external loans. If not, how do they make money? Make money by collecting savings? If that were the case, you could hire someone like that at minimum wage.

Some people would say that it is "unethical" for borrowers to default. Alas, most people who say this are capricious.当一家公司要关掉工厂，将就业岗位挪到中国的时候，或者给业绩不佳的首席执行长支付5,000万美元的薪水时，他们会第一个跳出来支持。 At this time, they will say, "This has nothing to do with morality, guys, it's business!"

But when the general public wants to do the same thing, they will shout "Imoral! Immoral!"

Our economy is not based on morality and fairness.

TMobile charges me every month not according to "fairness" but according to the contract. Your boss will not pay you a high salary just because you need a high salary. He will only pay you a salary based on "economic value." Did Dick Grasso, the former chairman of the New York Stock Exchange, give back his huge bonus? What about Bob Nardelli? What about Dick Fuld? Our economy is firmly based on contract. Nothing but contract. Corporations, as well as wealthy individuals, act strictly according to the letter of the law.

Mortgage contracts in the United States allow default. Bank loans in half of the U.S. states are "non-recourse" loans. Simply put, if you don't repay the loan, you just hand over the keys to the house without taking on the other responsibilities of a bad loan. The other half of the states are so-called "semi-recourse" states. In this case, the bank can ask you to make up the difference, but this request has limited effect. Simply put, banks cannot touch your retirement accounts and basic personal property. Generally speaking, you can continue to own your car, personal belongings, and things like life insurance are often fine.

Most people, when the loan balance is much higher than the market value of the house, have little property left.

The bank knows this. When they loaned $500,000 to a bus driver who only had $1,000 in his checking account, they knew the loan could only be secured by the house.

If they didn't know, well, they should have. Their incompetence is not our fault.

Someone might say, "If you borrow money, you have to pay it back." Generally speaking, I agree with this statement. I will pay back any money I borrow from others. However, what works for everyone may not work for everyone.

Even though we have tens of millions of people who cannot pay their debts, they try to pay them anyway. This has removed a considerable amount of funds from the social economy. This means that these people cannot function normally as consumers and workers. That's why people don't come to your restaurant, or go to your yoga class, or hire you to remodel their kitchen.

At the same time, tens or hundreds of millions of conscientious business owners and employees have also been affected by the economic downturn. This is why there is a shortage of demand. That's why no one continues to recruit.

Even worse, if the loan balance is higher than the market value of the house, you can't move your home to a place where you can find a job if you don't want to default. You're already stuck with their house that you took out a loan to buy.

How can we break this deadlock? The answer is Chapter 11 of the Bankruptcy Code, Mass Default. Leave decisively and write everything off.

Are there any other ways?

Let's cut government spending and increase taxes to balance the budget? Under normal economic conditions, this is feasible. But in the current situation, when the private sector is also starting to make deep spending cuts, these measures could have disastrous consequences. This is how the Great Depression happened. Our debt levels are worse now than during the Great Depression.

Let the government borrow money? This is the Keynesian solution. “Consumers can no longer borrow like crazy,” say the Keynesians, “so Uncle Sam has to step up and do it for them.” This is just converting private sector madness into public sector madness.

Use methods to stimulate inflation? This is probably the least negative alternative. However, this is also a breach of contract, just under a different name. It's no longer about taking money from the banks that caused this sloppy lending, it's about robbing grandma of her savings.

Developed economies have twice experienced the predicament we face now - a severe hangover after a massive debt binge.

The first time was the United States in the 1930s, and the second time was Japan in the 1990s.

It was not until the 1940s that large-scale currency devaluation was implemented to reduce the real value of debt that the United States got rid of the crisis.

Japan has not yet emerged from that crisis. They are experiencing deflation and government debt has risen rapidly.

The correct way to prevent moral hazard is to punish banks that lend rashly and let them bear losses.

I've told you, you won't like this approach. I don't like it either. But the alternative is worse.