Loopy Ideas

Brand Spanking New Ideas => Business & Commerce => Topic started by: innovator on February 27, 2012, 05:45:17 AM

Title: A crazy idea: Pardoning all our debts
Post by: innovator on February 27, 2012, 05:45:17 AM
Sometimes you come across an idea that at first sounds far too crazy to ever work. But then, as you think and do a little mental math, you find that it actually makes perfect sense despite running contrary to everything you would think should happen. One such idea calls for worldwide forgiveness of national and personal debts to get us out of the ongoing global economic turmoil, and not in the form of a leveraged buyout or new plans for repayment mind you, but that of a full on debt jubilee. Sound utterly absurd, doesnít it? Giving up on money you lent without getting a significant portion of it back in even the best case scenario? How will that help? Isnít the whole point of lending money to get it back with an interest payment in the first place? With trillions in debt around the world, surely this would only make things much worse for everyone as banks trying to collect have to write off billions since a similar dilemma triggered the Great Recession in the first place. But then again, if we consider one simple fact, this suggestion may not be as insane as it may seem. After all, thereís a reason why the banks and governments are trying to collect those trillions. Because their debtors donít have them.

Consider the following situation. You lent money to someone who used it to buy a new car and were getting a regular payment every month on the debt. However, things changed and the person lost his job. You took the car back but thereís still a lot of money owed on it and because a lot of other people lost their jobs, selling this car to get your money back is proving to be very difficult. Meanwhile, your debtor stopped paying you altogether because he chose food over paying back the debt. What are you going to do now? If youíre a mobster, you can send in Vinny with the brass pipe, but as a more or less respectable lender, all you can do is demand that he pays you and send nasty letters to credit agencies about his ability to honor his debts. You could hire a major collections agency to harass him but ultimately if he wonít pay, thereís no legal way to force him to do it over a small wage garnishment if he manages to find a job. After expending all the time, effort, and yes, money to file complaints and hire all the collection reps, you still donít have much cash back. Your debtor just doesnít have that money and all you have is the fantasy of getting it back and a note that someone owes you that cash. And at some point youíre just going to have to cut your losses and live with the situation or youíll lose even more in your attempts to recover the money that isnít actually there and may never materialize anyway.

Many lenders across the world are in the same situation. With widespread unemployment across the worldís economies, yawning national debts, and failing banks on life support all around them, their debtors arenít very likely to have the money to pay them back and in some cases, their hounding actually interferes with whether they can even get a job to pay them at all. When banks refuse to modify loan payments or harass debtors, they effectively shoot themselves in the foot by sabotaging a method of getting their money back to some degree in the near future while building ill will with their debtors, giving them every reason to think that thereís absolutely no way to reason with them, and trying to create an alternative debt repayment plan and just walking away with no additional payments will have the same exact consequences. Given the pressures of survival, they will opt for simply walking away more often than not under these circumstances. Banks win nothing, the debtors lose across the board, nobody is happy, and the banks may now have to ask for new handouts because for some odd, inexplicable reason, their debtors arenít paying them back. So a debt jubilee is basically saying "forget it, weíre just going to start over." Of course thereís the moralistic downside of excusing debtors who acted in bad faith and falsified information, but in the grand scheme of things, banks donít exist to enforce morality.

Lenders are in business to make money and relying on imaginary money that should come any day now from the deadbeats is not profitable. Instead of demanding cash theyíll never see or growl about giving debtors an easy way out, they should simply make it hard for those whose debts are forgiven to take on new loans until a new track record of good payments can be established and let those bad debts go. This way, those who stay current and repay their debts on time are given great borrowing terms as a reward, while those whose debts were discharged would be denied all but the absolute basic lending services as a punishment, much like we already do. Bad debts are cleared, companies can now operate with more freedom, people under a crushing debt can finally breathe out and start spending and stabilizing themselves. This would be especially true for a household in which a medical emergency triggered a default since people donít have a choice in getting sick, and medical care can be exorbitantly expensive, resulting in six-figure medical bills few can pay. Though, as a world fatigued by three years of debt crises recovers through debt forgiveness, there has to be an agreement that no one can continue the status quo and trigger another such debt crisis, an agreement what will be hard to reach once the global debt forgiveness genie is out of the bottle and can be summoned againÖ