Writing of debts according to the Zingales Plan
The households of Iceland are still awaiting solutions for the problems they are facing in the wake of the economic disaster.
The government of people in the fifties has still not offered better solutions to young people than to make the final payments of their price-indexed home loans on their one hundreth birthday. Is it too much to ask that other options be examined carefully?
For some reason, the discussion has revolved around a 20% write-off on loans, a solution put forth by the Progressive Party and supported by Independent Party members that still have a beating pulse, and the Spokesman for Consumers. The Citizen’s Movement and others have spoken of lowering the capital of loans to what they were before the crash.
Atonishingly but maybe because this is a sensitive matter, few other solutions have been circulating. A write-off in debts hurts the creditors, and the Progressives started off on the wrong foot by mixing in other debts than those with collateral in homes. The government rightly points out that such a cut would be a costly one, which it can ill afford while it is busy writing off tens of billions to businesses that have been run into the ground.
But why aren’t other ideas allowed to see the light of day? In the US, professor Luigi Zingales of the University of Chicago has made an interesting proposal, known as the Zingales Plan. It suggests that debts in those areas that have been most hit by the economic storm agree on a write-off, which can be anywhere between 30-50% of the loan’s capital. Instead the creditor receives the same percentage of the sales profit on the property when it is sold in the future.
This plan is ingenious in the way it allows both sides to see hope in the future, while it releases some much needed oxygen into the economy. There are doubtlessly holes in this plan but it seems to make an attempt of marrying the interests of both sides, not just the one of captial owners, who enjoy unlimited protection compared to debtors in Iceland. It is also expensive to lose whole generations into bankruptcy or into exodus.
Those who have other good ideas on this issue shold step forward as soon as possible. The government should look at the Zingales plan, the 20% plan and all others with an open mind.
It is now almost nine months since the economic crash and Icelandic households have been experiencing an almighty squeeze while waiting for solutions. I have since become more and more convinced that the discussion in the media and Althingi is being held hostage.
The culprits are a Progressive Party that doesn’t want any solutions except those that come from themselves (so much better to claim the credit) and a government that is so torn it is unable to deliver any. The media is so crippled that it doesn’t have the might to dip below the surface of easy and quick soundbytes from Sigmundur David Gunnlaugsson, the Progressive Party leader and a testy reply from usually Steingrimur J. Sigfusson.
Last month I wrote this opinion column in the daily Morgunbladid, trying to push an idea into the mainstream that I believe is far better than the 20% write off proposed by the Progressives, the Zingales Plan that I have discussed here befores.
I have discussed this with 5-6 economists and bankers of a good caliber and they all agree that this plan is vastly better than what has been proposed already. Unusually for Icelandic economics, it cares for the interests of both parties, not just creditors.
It is especially strange to listen to the Central Bank and government claim these days that relatively few households are experiencing negative home equity without any supporting numbers. What housing market exactly are they comparing the market-price with? There is no housing market to speak of in Iceland. Therefore most homes have negative home equity and those between the age of 25-50 who don’t own their homes outright (very few) are all in the red.
Our politicians are still not out of the sandbox. The hope that they will find their way out is shrinking every day.
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Roy
2 years ago
They have reached rock bottom and are continuing to dig!
Vilhjálmur Árnason
2 years ago
A write-off in debts hurts the creditors.
Þessi fullyrðing er að mínu mati ekki sönn.
Það er kröfuhöfum í hag að afskrifa vissar niðurfærslur.
Lækkun höfuðstóls er samfélagslegt réttlætismál. Tilfærslur frá húseigendum til kröfuhafa verðtryggðra skuldabréfa eru ólöglegar. Þetta er óréttmæt auðgun. Sama á við um gengistryggð lán.Ríkið á að sjá sóma sinn í því að innkalla alla þessa samninga og ógilda. Um þá ber að endursemja með hlutlausum aðila.
Vilhjalm A.
2 years ago
Well done, Daði.
It’s astonishing that no one in power is willing to consider any new proposals or ideas. The only thing they can think of are regressive user fees and taxes, which benefit the state very little. What about changing the tax on dividends to 20-30%, or changing the highest income bracket rate to 55%? How difficult can that be? Even the paralyzed taxaphobic Americans have raised income tax rates in response to the crisis.
The Zingales plan is a little complicated but it solves the basic problem of keeping homeowners in place, at a payment rate they can afford, while not depriving the lenders of anything or increasing the deficit of the government. It does not disturb existing property law – it simply separates out the future interest (a real interest, with value) and transfers part of that to the creditors/state. Not unlike selling future mining or fishing rights. The Icelandic banks were happy to buy and sell future fishing and energy rights, why not buy and sell future housing interests?
I wonder if the opposition to such mortgage modification plans, in Iceland, USA and elsewhere, stems from an unwillingness to determine the fair market value of housing (i.e. using mark to market valuation). If governments were to admit that house prices have fallen 30%, or more, then the banks are technically insolvent.
Sooner or later (probably within a year) the housing problem will be too big to ignore. Probably tens of thousands of people will be unable to make payments and become “non-people” living in the extra rooms (if any) of relatives. Is that what the government wants, a country full of debt fugitives? It looks like it.
Right now it looks like the official policy is to “pray for a miracle”.
Joseph Stiglitz’s Got The Solution But Lilja Doesn’t Get It
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[...] A great idea. Have you heard it before??? [...]