An arrogant view of insolvency?

Discussion in 'Economics' started by morganist, Feb 20, 2011.

  1. An arrogant view of insolvency?

    http://morganisteconomics.blogspot.com/2011/02/arrogant-view-of-insolvency.html

    I often speak with free market proponents and business leaders in relation to the debt problems and the inability to repay existing debts. When I do I am often surprised to hear their responses. So many of them simply say that people should go bankrupt and the free market will flourish because the failed entrepreneur will start again with a new successful business. To me this sounds ludicrous firstly because most of the people who are in debt are not entrepreneurs in any way shape or form. They are people that were lent money by banks knowing that it was unlikely that they could repay, with the simple intention that the banks could maximise their own profits by lending as much money as they possibly could. The reason banks make more money by lending is because it generates interest payments, which does not happen if the money is inactive in the reserve account, which in turn led to greater lending targets to increase profits. This led to people who could not realistically make the repayments being lent money purely so the banks could increase their profit margin.

    The second reason I am surprised by the responses of business leaders is the simple gravity of the debt crisis, and believe me it is a crisis. At present in the UK private citizens owe in excess of £1.46 trillion, remember this is the UK not the USA and this figure is equal to or at times in excess of the GDP. The shear level of bankruptcies required to clear that debt is insurmountable, not to mention the write-off of the value of the debt. Remember that one person’s debt is another person’s asset. Each debt obligation owned by the bank is another person’s life savings or pension pot or businesses investment portfolio. The fact that most free market supporters are not capable of appreciating the gravity of the effect on existing savers assets if everyone simply went bankrupt terrifies me. There is also little understanding of the effect on demand for goods. The money which is saved especially in pensions is used to provide an income for a large percentage of people, this income creates consumer demand. Once the debt contract is defaulted the repayments will stop and the income generated by the pension fund will also cease. In short the pension fund will collapse and consumption of pensioners will collapse with it.

    What is really needed instead of bankruptcy is way of making the repayments continue without default even if the repayments are less than they were before. By making the repayment structure flexible to the needs of the debtor (the person who owes the money) this could be avoided and prevent default of future repayments when the economy recovers. Perhaps there would be an argument for bankruptcy if the debtors were entrepreneurs and were likely to introduce new business plans. However most of the debt has been used to purchase individual’s domestic consumer goods instead of promoting business. This leads me to the conclusion that mass bankruptcy although likely would be very serious to the economy.
     
  2. What is really needed instead of bankruptcy is way of making the repayments continue without default even if the repayments are less than they were before. By making the repayment structure flexible to the needs of the debtor (the person who owes the money) this could be avoided and prevent default of future repayments when the economy recovers.

    Hi Ben. :D
     
  3. Ben who. Why Ben?
     
  4. Ben Bernanke. Imo, in the grand scheme of things, that is current Fed policy.
     
  5. How the fed is not producing any new kind of insolvency product. Nor is it in any way helping to make the payments to cover losses to savers. The only thing it is doing is propping up banks, probably because it is a way of directing money to them. There are after all large share holders in the banks.

    There has been no effort to reimburse people who have lost their pensions to date in the private insolvency business. This is where the real tragedy is.

    What do you think of the new look of the blog? Is is getting better? I have spread out the margins a bit and gone for a lighter background.
     
  6. I don't see insolvency as a "crisis". Many consumers need to use legal remedies to clean up their balance sheets and move forward.

    The banking industry has finally come to this conclusion and are streamlining the process in the housing market by facilitating short sales and in some cases recommending it.

    Bankruptcy rates remain at record levels and although painful it is the best and most efficient way for many consumers to get out of a mountain of debt and move forward.

    The big question is, will states and municipalities be next as Whitney suggests? If so, what will be the impact of these defaults and the economy?
     
  7. Thank you. I think I'll keep like this for a while because it is very bland and that is apparently what people want. I have another site that is very designed.

    morganisteconomics.org.uk

    Unfortunately the guy who designed it is busy. Eventually I will make it look like that but I will have to wait. What do you think of that site is that better.
     
  8. Remember most of the people that were lent money do not have any assets. In the UK and I think the US subprime people were lent more than the price of property so there is no equity. Plus most of the money is on credit cards. It was spent on consumer goods, no value has been maintained the money was spent and the product s=consumed.

    In short there is no asset or very little to streamline. This is the problem I had working in insolvencies. There were a lot but they had no money to pay the insolvency practitioners fees.

    I worked in insolvency for a few years in different jobs. It made me quite ill. So many peoples life's were ruined.
     
  9. I'm unsure of the UK, but in the US the typical BK runs around $2k. The US has been running about 120,000 bankruptcy's per month for well over a year and is sadly a growth industry.

    Although these represent personal failures, I don't see this as a case of ruined lives, but an opportunity for a fresh start. The typical consumer will emerge from bankruptcy debt free and with a positive balance sheet. They will be credit "impaired" for a while, but will eventually return to the credit markets, hopefully wiser and better prepared to deal with the risks associated with credit.

    In many cases, the consumer would be better off to "clean the slate" then attempt workouts that leave them with their debts and bad credit. At least with a BK the debts are gone and they have an opportunity to begin again.
     
    #10     Feb 20, 2011