November 3, 2010
A couple of weeks ago this column suggested that it would be a workable idea to freeze mortgage payments for a couple of years to provide some stimulus to the economy.
As is usual in our country, any suggestion of easing the burden on Irish mortgage holders is greeted with howls of derision from many sides.
Similar howls were heard a few years ago when an economist called for restraint. When considering new ideas, it is worth bearing in mind the mentality of the herd.
In the boom, the herd’s view of the economy could be aptly described as “expansionist”. Back then, the crowd contended that we could expand to a degree not seen before, because “this time it is different”. Well, it wasn’t different. The herd was wrong. Today, the same people who argued for infinite expansion and borrowing in the boom are now telling us that we can’t countenance any debt deferral for people who can’t pay. So the herd in Ireland has swung from wildly expansionist to crudely reductionist in three years.
Many people are against the idea of a mortgage amnesty. Their argument generally runs along the lines of: “I didn’t buy a house in the boom, so why should I have to pay for someone else’s bad decision?”
Others argue that an amnesty rewards “bad behaviour” and would lead to moral hazard. Maybe we should be less concerned by “moral hazard” and more worried about “real hazard”. Real hazard is when people — our neighbours, our friends, our families — begin to lose hope in the future.
On Monday there was another clear example of this when the very admirable (and desperately needed) www.newbeginning.ie was launched. New Beginning is a group of solicitors, barristers, economists and businessmen who have seen the gross inequality played out daily in the High Court where people are appearing in front of judges without any representation — because they can’t afford it. Bad enough that these misfortunates are losing their homes, which they can no longer afford, but down in our courts they are being harassed by legal teams paid for by the banks — and, of course, the banks use your money as it is your money that has bailed out these delinquent banks.
New Beginnning should be lauded for their excellent work in defending people who have committed no greater sin than to believe their government.
Remember the litany of politicians, so-called economists, and other “experts” from 2006 and 2007 telling us that “the fundamentals are strong”. These “fundamentalists” were the lads that brought you such fantasies as the “soft landing”.
The victims of this terrible advice can be seen daily in the High Court. In contrast, the people who dispensed that advice are shielded from the consequences of their actions.
It is worth reminding the people who hate the idea of helping those in dire straits what doing nothing could mean for the economy.
At last count there were about 36,000 people in the country who have not been able to make a mortgage payment in three months. This figure hides the number of people who are paying smaller amounts. It is easily possible that twice that number are in real trouble with their mortgages and are at risk of losing their homes.
So let’s say we do nothing to help them. It is fairly safe to assume that the majority of people in difficulty are under 40. In 2007, I wrote a book called ‘The Generation Game’ that focused on what would happen to this generation when the crash came. Most have young families. These people were Ireland’s “favourable demographic situation” that we heard would keep the property bubble inflated. These are the Pope’s Children.
If we do nothing, they are going to turn into our lost generation. Their children, born into the kind of poverty that comes with large unpayable debts, will be disadvantaged for years.
Simple analysis says that we had the party during the boom, now we have to suffer the hangover. In economics this is not hangover but an overhang or, more specifically, a debt overhang.
Some economists argue that we need to go through a type of cleansing period to learn the lesson and, therefore, people paying back debt and increasing their savings now is the only way forward. They argue that the savings in the banks will be borrowed by companies that want to invest. Therefore, the money which is now paid in mortgages will find its way out into the economy via funds for investment. I would go along with that view if the banks weren’t bust and incapable of providing credit to the economy. But the banks are the bottleneck and therefore, some other way of keeping credit going needs to be conceived.
The people who are shouting “unfair” and “moral hazard” are cutting off their nose to spite their face. By sacrificing their neighbours on the altar of “I told you so” they are ensuring their own demise, and more importantly, the demise of what is left of Ireland’s economy and, possibly, our social cohesion.
OF course, there is another way. New Beginning is a start. They intend to challenge some mortgages because banks did not take their duty of care seriously. It seems obvious to me that they are right, but Ireland’s contract law is as Victorian as our bankruptcy law, so perhaps we’d better wait and see.
What is really needed is a mortgage amnesty. I will not call it “debt forgiveness” because that implies a sin, and there are no sinners among the unfortunates in the High Court.
People made a mistake when they bought during the boom. They presumed that their well-paid jobs would last and that house prices would rise forever. They got caught up. By not helping them, we are all making a huge mistake that will prove costly.
I didn’t go mad in the boom, but I can see how my family’s prospects are related to my neighbour’s. Arguably, those of us who were vilified back then for predicting the crash should be the ones with the biggest motivation to see those who ridiculed us back then punished now. But societies don’t have to work that way.
When you look at history, you see that booms and crashes are always followed by a change in the way people look at the society and the economy. Roosevelt’s communitarian New Deal which followed the individualistic Roaring Twenties came with federal welfare, housing and work programmes, bank deposit insurance, prices and incomes policies, minimum wage legislation and mass debt amnesties. Ultimately, the US itself came off the gold standard and defaulted on its sovereign debts.
These moves were anathema to many who believed that the people who got caught in the share and property crash of 1929 had only themselves to blame.
However, the point is that by 1932 the world had changed and when the world changes so too do attitudes.
Who can doubt that our world has changed? Who can doubt that our attitudes will change too?
David Mc Williams hosts Ireland’s first economics festival from November 11. Details at: www.kilkenomics.com