Bankruptcy is ahead on the marketplace of ideas as far as solutions to the massive debt facing Icelandic households is concerned.
A fortress around the households in Iceland promised by the government has turned out to be one around financial institutions. The latest news claim that the foreign creditors of Byr S&L are writing off a part of the institution’s debt. Could that possibly be because they realise that if they claim the debt as a whole, then it will be the kiss of death for an operational financial system in Iceland? Much in the same way, operating a household in Iceland is close to becoming impossible, if a write off in household debt will not occur.
There are two reasons that necessiate a write-off in foreign currency loans. On one hand, the debtors were in a weak position when negotiating with strong financial institutions that held all the cards as far as inside information on the real value of the ISK and markets in general. Early 2008, voices could be heard from within Icelandic commercial circles, whispers about the magic number 180, which is where the banks were supposed to be directing the ISK. What chance do ordinary borrowers stand against a system which works so blatantly against their interests?
On the other hand, Icelanders run towards foreign currency loans in the past few years and the collapse of the ISK that followed, is the best evidence we have of the long lost confidence of Icelanders in their currency and the economic management of their country.The commercial sector of Iceland has set its aim towards the Euro for years because it realises the destructive powers a sensitive micro-currency in an open economy has on businesses and households. Previous governments’ stubborn use of methods fit for much larger economies has left behind a scorched earth. A sensible man would never feed a mouse the same way he feeds an elephant, even though learned papers would suggest he should.
That is also why the terrible effects borne by price indexed loans in ISK must be corrected. Economists such as Gudmundur Olafsson are prone to misleading the public by likening their mortgages to the purchase of horses. He uses the analogy of when a man borrows ten horses from him, he expects ten horses back. He makes no mention of the responsibility bestowed upon him as the lender to provide the borrower with healthy horses instead of limpering and diseased ones. If he fullfills that obligation then it is easy to return the ten horses. If not then the borrower is at a terribly unfair disadvantage.
In civilized societies, consumers are guaranteed the right to return faulty products in exchange for money back or products that work. Seeing the capital of a mortgage grow by 25% in three years, in spite of 25% of the original amount being paid onto it, indicates that the product is faulty, even dangerous. It should be the right of consumers to return the product or at least get one that works.
Traffic has been limited on the marketplace of ideas, as far as solutions to the household debt are concerned. The Progressive Party put forth a hasty campaign promise of 20% debt relief across the board. Their solutions are lacking in debt and the party does not seem to have cared enough to extend their reach, probably not until the next election. It also has to be said in all honesty that after the shenanigans of the last two decades the Progressive Party has put itself in such a position that their ideas are automatically distrusted. That is why it is just about impossible for the government to accept their solution, even though it would never say so openly. The idea is dead in the water even though it keeps rearing its ugly head too often.
On the other hand the government itself has displayed an incredible lack of ideas. The ideas and suggestions of Gylfi Magnusson and Steingrimur J. Sigfusson have revolved around helping only those who are in the most dire need of help. That way of doing things is sorely lacking in transparency. Is it for example possible that the same indidviduals are at advantage, who got warning calls from banks and officials in the weeks leading up to the crash in 2008, and managed therefore to get away with what they could while it was still worth something? Settling these things behind closed doors is not likely to build trust but more on that later.
Then recently Thorolfur Matthiasson, professor of economics at the University of Iceland came forward with yet another solution. To tie people’s mortgage payments to their income. Supported by ideas of Icelandic economists who are lucky enough to live abroad and have their income in a stable currency, people who only seem to have macroeconomical tools at their disposal. Their understanding of running households appears miniscule. Today, student loans are collected this way, and those who have dealt with that system know that not all is well with that arrangement. It is faulty as it uses last years’ income as a benchmark, not the current one’s, and of course the loans are price indexed so the capital grows like an insatiable monster while the borrower attempts to pay them back. (Little regard is also made for other debts the person might hold)
There are more ideas around, but to introduce new products into beforementioned marketplace you have to cut through the noise. One that has gotten little or no attention but has been thought out better than most is the Zingales-plan. Luigi Zingales is a professor at the University of Chicago who has suggested that the creditors and borrowers negotiate a write-off up to 30-50%. Instead the creditor is entitled to 30-50% of the sales profit from said property if it is sold in the future. This is the framwork but of course it can be laid out according to respective scenarios. The idea revolves around borrowers and creditors making an agreement towards the future, with both parties interests tied together. This was the gist of an idea proposed by Joseph Stiglitz at a seminar at the University of Iceland last week. The media failed to respond, as most of them were sitting outside the lecture hall, waiting to ask Stiglitz effortless questions.
And there we have arrived at the heart of the problem. Icelandic academics and politicians have so far been found to be wanting in ideas that inspire such trust in the Icelandic system that people become willing to build a future, form businesses and raise future generations. The homemade solutions that have been in the spotlight so far are limp compared to the solutions of Zingales and Stiglitz.
It is time to prevent the households’ bankruptcy at the marketplace of ideas. Even though the Progressive Party makes a lot of noise about its way, it is mostly beneficial as a campaign promise. Even though Thorolfur Matthiasson is well-meaning, there is no solution or hope included in his suggestions. Solutions must be explored that tie together the future intersts of households and financial institutions. Lets spend more time on examining what Zingales and Stiglitz have suggested instead.Here
Here is a translation of an opinion piece by me that was published last week at the Silfur Egils blog;
Bankruptcy is ahead on the marketplace of ideas as far as solutions to the massive debt facing Icelandic households is concerned.
A fortress around the households in Iceland promised by the government has turned out to be one around financial institutions. The latest news claim that the foreign creditors of Byr S&L are writing off a part of the institution’s debt. Could that possibly be because they realise that if they claim the debt as a whole, then it will be the kiss of death for an operational financial system in Iceland? Much in the same way, operating a household in Iceland is close to becoming impossible, if a write off in household debt will not occur.
There are two reasons that necessiate a write-off in foreign currency loans. On one hand, the debtors were in a weak position when negotiating with strong financial institutions that held all the cards as far as inside information on the real value of the ISK and markets in general. Early 2008, voices could be heard from within Icelandic commercial circles, whispers about the magic number 180, which is where the banks were supposed to be directing the ISK. What chance do ordinary borrowers stand against a system which works so blatantly against their interests?
On the other hand, Icelanders run towards foreign currency loans in the past few years and the collapse of the ISK that followed, is the best evidence we have of the long lost confidence of Icelanders in their currency and the economic management of their country.The commercial sector of Iceland has set its aim towards the Euro for years because it realises the destructive powers a sensitive micro-currency in an open economy has on businesses and households. Previous governments’ stubborn use of methods fit for much larger economies has left behind a scorched earth. A sensible man would never feed a mouse the same way he feeds an elephant, even though learned papers would suggest he should.
That is also why the terrible effects borne by price indexed loans in ISK must be corrected. Economists such as Gudmundur Olafsson are prone to misleading the public by likening their mortgages to the purchase of horses. He uses the analogy of when a man borrows ten horses from him, he expects ten horses back. He makes no mention of the responsibility bestowed upon him as the lender to provide the borrower with healthy horses instead of limpering and diseased ones. If he fullfills that obligation then it is easy to return the ten horses. If not then the borrower is at a terribly unfair disadvantage.
In civilized societies, consumers are guaranteed the right to return faulty products in exchange for money back or products that work. Seeing the capital of a mortgage grow by 25% in three years, in spite of 25% of the original amount being paid onto it, indicates that the product is faulty, even dangerous. It should be the right of consumers to return the product or at least get one that works.
Traffic has been limited on the marketplace of ideas, as far as solutions to the household debt are concerned. The Progressive Party put forth a hasty campaign promise of 20% debt relief across the board. Their solutions are lacking in debt and the party does not seem to have cared enough to extend their reach, probably not until the next election. It also has to be said in all honesty that after the shenanigans of the last two decades the Progressive Party has put itself in such a position that their ideas are automatically distrusted. That is why it is just about impossible for the government to accept their solution, even though it would never say so openly. The idea is dead in the water even though it keeps rearing its ugly head too often.
On the other hand the government itself has displayed an incredible lack of ideas. The ideas and suggestions of Gylfi Magnusson and Steingrimur J. Sigfusson have revolved around helping only those who are in the most dire need of help. That way of doing things is sorely lacking in transparency. Is it for example possible that the same indidviduals are at advantage, who got warning calls from banks and officials in the weeks leading up to the crash in 2008, and managed therefore to get away with what they could while it was still worth something? Settling these things behind closed doors is not likely to build trust but more on that later.
Then recently Thorolfur Matthiasson, professor of economics at the University of Iceland came forward with yet another solution. To tie people’s mortgage payments to their income. Supported by ideas of Icelandic economists who are lucky enough to live abroad and have their income in a stable currency, people who only seem to have macroeconomical tools at their disposal. Their understanding of running households appears miniscule. Today, student loans are collected this way, and those who have dealt with that system know that not all is well with that arrangement. It is faulty as it uses last years’ income as a benchmark, not the current one’s, and of course the loans are price indexed so the capital grows like an insatiable monster while the borrower attempts to pay them back. (Little regard is also made for other debts the person might hold)
There are more ideas around, but to introduce new products into beforementioned marketplace you have to cut through the noise. One that has gotten little or no attention but has been thought out better than most is the Zingales-plan. Luigi Zingales is a professor at the University of Chicago who has suggested that the creditors and borrowers negotiate a write-off up to 30-50%. Instead the creditor is entitled to 30-50% of the sales profit from said property if it is sold in the future. This is the framwork but of course it can be laid out according to respective scenarios. The idea revolves around borrowers and creditors making an agreement towards the future, with both parties interests tied together. This was the gist of an idea proposed by Joseph Stiglitz at a seminar at the University of Iceland last week. The media failed to respond, as most of them were sitting outside the lecture hall, waiting to ask Stiglitz effortless questions.
And there we have arrived at the heart of the problem. Icelandic academics and politicians have so far been found to be wanting in ideas that inspire such trust in the Icelandic system that people become willing to build a future, form businesses and raise future generations. The homemade solutions that have been in the spotlight so far are limp compared to the solutions of Zingales and Stiglitz.
It is time to prevent the households’ bankruptcy at the marketplace of ideas. Even though the Progressive Party makes a lot of noise about its way, it is mostly beneficial as a campaign promise. Even though Thorolfur Matthiasson is well-meaning, there is no solution or hope included in his suggestions. Solutions must be explored that tie together the future intersts of households and financial institutions. Therefore we should spend more time on examining what Zingales and Stiglitz have suggested.
Related posts:
- A 110% Folly
- Discussion On Household Debt Held Hostage By Progressive Party
- IMF Representative Answer: Not Against Debt Reorganization But…
- Is The IMF Stopping The Remittance of Loans?
- The Press Is On The Outside
Melvin Godfried
2 years ago
Just to contemplate that Gudmundur Olafsson, who I like to refer to as shit for brains, is teaching university students this garbage leaves a queasy feeling in my gut!
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