Since I’ve been lambasting the media, I also think credit is due to Frettabladid which covered Joseph Stiglitz’ appearance at the University of Iceland brilliantly today.
All the main points from the meeting are discussed and framed in such a manner that they are easily understood, and not just by economists.
Related posts:
Vilhjalm A.
2 years ago
Here’s a partial summary, in English, of the interview with Stiglitz in Frettabladid:
Indexation based on wages
http://www.newsfrettir.com/politics/financial-crisis/1140-indexation-based-on-wages
“The indexed housing loans, as well as the currency insured loans, are risky deals which the government should have warned the public about. It is a faulty product which the government is to review. This is what Joseph Stiglitz nobel prize winner in economics has said.
He says that the indexation should be connected to the income index number not the consumer price index as is being done today. The system has to be changed and give people a chance to start over, and that has to be done as soon as possible.
“It is a question about efficiency, social rights, social solidarity and righteousness,” said Stiglitz in a conversation with Frettabladid. It is important to correct the debts of the homes without those who have not taken a risk in finances having to pay the bill.
The Icelandic experience of the collapse calls for new tools to be created which deals with wages lowering at the same time as prices raise, said Stiglitz. In stead of fastening the amount of the loans to the consumer price index as is being done now would be much better to fasten it to the wage development in the country.
“[The indexation] insured that the bankers would get their loans paid back, but they forgot that the bankers can only get paid back if the loan taker is alive. They really decided to kill the loan taker,” he said.”
Since then, Gylfi Magnussen Finance Minister has said that the government has been considering adjusting mortgages to the wage index or the real estate index, rather than the price index, but “at this stage it is only an academic discussion.”
In other words, Gylfi M intends to ignore Stiglitz and wait for the controversy to blow over, and instead offer at most some sort of temporary, bandaid remedy rather than correcting the root of the problem.
I don’t know what sort of solution he has in mind, but I assume it is short-term debt postponement (or partial forgiveness of interest-debt alone, not principal) for those most in danger of defaulting on their home-loans. (Or perhaps what Gylfi M. plans is the proposal of Þórólfur Matthíasson to link mortgage-payments to personal income, not unlike the Obama regime plan to limit mortgage-payment from 38% to 31% of personal income for those in trouble. This 38/31 plan has been already proved to be a completely ineffective bandaid approach.)
Of course, as the home-debt crisis worsens over the next few years, and it will worsen, the government will be forced to continue to throw out piecemeal debt repayment freezes or small interest-only forgiveness. The government can’t or won’t confront the probem directly — indexation combined with inflation, wage stagnation, and a home property value crash.
Eliminating indexation by itself will not solve the problem, since home-debt will have gone up by 20% in the last year alone. So a principal forgiveness scheme is necessary too. As i said in my earlier comments, the banks cannot give general writeoffs, such as the most recent plan to write-off 25% up to a maximum of 7 million, because that would cause the banks to recognise the reductions immediately and thus become insolvent. Also, the IMF has forbidden the government to give any general debt write-offs, as a precondition to receiving more loans. This is why Stiglitz et al have proposed a quid pro quo of mortgage principal reduction for a share of future interests (ie profits). It is not a general write-off, and any book losses the banks suffer will be recognised over the course of many years rather than all at once (especially if participating homeowners must agree not to sell for at least three years.)
The Irish have taken this piecemeal approach, and you can easily guess how that will end — badly. Apparently they are giving reductions of 25% of the interest (not the principal), with lots of strings attached: only to low-income first-time homebuyers who bought since 2002, and only for a period of 7 years. The Irish property market has already crashed 30-40%, and is predicted to end with a 75% haircut. The Irish will eventually have to deal with many millions of foreclosures.
The new element in the equation is the possibility that price-indexed loans (or at least foreign currency loans) will be declared illegal. Gunnar Tomasson has made this argument and apparently now there is a lawsuit in the works by Bjorn Th Viktorsson. I don’t know how this effects the regular ISK mortgage situation but it should if nothing else bring some attention and scrutiny to the indexation problem, if there are not riots in the street before then.