What if a fiscal day of reckoning is on the horizon: the day when the majority of mortgage holders collectively shout FUCK IT, and default on their mortgages? Ben Bernanke’s scared of such a proposition, and has couched it in an inverse fashion: the problem is not the lender’s, but the borrower’s:
However, holding liquid assets that are only a fraction of short-term liabilities presents an obvious risk. If most or all creditors, for lack of confidence or some other reason, demand cash at the same time, a borrower that finances longer-term assets with liquid liabilities will not be able to meet the demand. It would be forced either to defer or suspend payments or to sell some of its less-liquid assets (presumably at steep discounts) to make the payments. Either option may lead to the failure of the borrower, so that the loss of confidence, even if not originally justified by fundamentals, will tend to be self-confirming. If the loss of confidence becomes more general, a broader crisis may ensue.
Suicide Spreads as One Solution to the Debt Crisis
IMF sees no end in sight to credit crisis
$995 Service lets borrowers walk away from their mortgages.
Borrowers more willing to walk away from mortgage debt
Cooper told Maui the whole block is gone
They’re dying for jewelry, money, and clothes
I always get out of the trouble I’m in
I want to walk away, start over again.
I left my bible by the side of the road
Carve my initials in an old dead tree
I’m going away but I’m going to be back when
It’s time to walk away and start over again.
Tom Waits – Walk Away
This is the road that drove the Medici bankers bankrupt a few centuries ago. By 1776, Adam Smith was led to conclude that no government ever had repaid its foreign debt. No private sector has reduced its debt level for long either–except through bankruptcy, moratorium and repudiation. These are the options that face us today. But they are not politically acceptable for public discussion. The last time the economics profession addressed the global debt problem was in the 1920s, in response to the unpayably high level of German reparations and Inter-Ally arms debts to the United States. Since that time there has been much talk of monetary theory, but little attention to measuring the ability of economies to carry their domestic and foreign debt overhead.
