
Trillions in Bad Loans May Sap World Economy for a Long Time - es09
http://www.nytimes.com/2016/02/04/business/dealbook/toxic-loans-in-china-weigh-on-global-growth.html
======
ihsw
Why not forgive the loans? The negative affect of debt on people's capacity to
contribute to the world economy is high, and I think it stands to reason that
people would contribute more for the duration of paying off their loan if the
loan wasn't hanging over their head.

The banks would scream bloody murder, obviously, but their slack policies got
us into this mess in the first place.

The intention is to throw people a rope to save them from drowning, but the
rope is ending up as a noose around their neck more than anything else. The
government's may have had good intentions in their support for the
proliferation of subprime lending, but I think it would've been more effective
to _just give people money_ without the expectation that they pay it back
directly. It will find its way back into the economy as, so to speak, _trickle
up economics_.

~~~
jasode
_> Why not forgive the loans?_

The idea of a "debt jubilee" is definitely something that's been discussed
before by economists and philosophers.

One big issue is that there are _other people on the other side_ of those debt
cancellations that would get hurt.

For example, it's terrible that young adults have massive college loans to pay
back. Some are kicking around the idea to forgive those loans. But there are
also creditors as well. Think of grandparents who have a 401k for retirement.
Through the interconnectedness of the financial system, a component of their
retirement income will depend on payback of those "bad" college loans.

Will those senior citizens happily vote for a debt reset if they know their
retirement savings get reduced? Seems doubtful.

The way to sell the idea of debt forgiveness is to convince the creditors that
it's _impossible_ for the debtors to pay them back. Therefore, take a
financial hit _now_ instead of later so the economy can get moving.

~~~
Frondo
This is a really good point. My gut tells me that if the old people were
relying on the massive indebtedness of today's college attendees, then that
has been a cruel error on their part, an injustice that should be righted.

Also, the artificiality of the debt--and the idea that a jubilee won't really
_hurt_ the creditors--is put into striking relief by the Rolling Jubilee.
Right now, people are already buying that bad debt for pennies on the dollar,
just to wipe it out. I'd like to see if anyone's modeled what would happen if
that behavior were just turned up to 11, who'd be harmed, etc.

~~~
jasode
_> if the old people were relying on the massive indebtedness of today's
college attendees, then that has been a cruel error on their part,_

Oh no no... I don't want people to picture an old hag sucking the blood of
infants.

To clarify, I was using "grandparents" as a single example to _humanize_ what
a "creditor" was. _We have met the creditors and they are us._ [0] When
society complains about the unfairness of student loan debt, we tend to think
of the creditors as something _abstract and invisible_.

The total student debt is ~1.3 trillion[1]. If forced to picture _who_ is owed
that money, maybe college kids would think of some evil mustache twirling CEO
of Goldman Sachs or Chase Bank. Sure, some fraction of a fraction of the
interest payment does go to executives like them but the vast majority of the
money goes to us.

That 1.3 trillion is _diffused_ throughout the economy. The pensions of police
officers, firemen, and teachers. The car insurance premiums we pay is priced a
certain way based on investments that point to those college loans. Etc etc.

At the moment, the struggling college grads are "visible" and the creditors
seem "invisible" but trust me, if a political movement gathers steam to ask
Congress to forgive those loans, all those invisible creditors will come out
of the woodwork at Congressional hearings and fight it.

Trying to convince millions of us to zero out the balance sheets for those
student loans will be a huge uphill battle.

[0]riff on:
[https://en.wikipedia.org/wiki/Pogo_(comic_strip)#.22We_have_...](https://en.wikipedia.org/wiki/Pogo_\(comic_strip\)#.22We_have_met_the_enemy_and_he_is_us..22)

[1][http://www.marketwatch.com/story/every-second-americans-
get-...](http://www.marketwatch.com/story/every-second-americans-get-buried-
under-another-3055-in-student-loan-debt-2015-06-10)

~~~
TheOtherHobbes
No, this is incorrect.

Firstly, the debt burden is only diffused because those "mustache twirling
CEOs' decided it should be.

Pensions used to work just fine before they were financialised by sharks. So
did insurance.

No one sane should be trying to increase the returns on a pension fund by
gambling on student debt, on real estate loans, or on consumer credit.

That was exactly the approach that caused the implosion of 2008 - or more
specifically, it was "mustache twirling CEOs" hiding the fact that the
investments they were selling as a sure thing were junk loans with a cheap
wood veneer.

Secondly, even if this wasn't true, the social and economic costs of an
economy that runs on usury instead of productive investment are so predictably
crippling that the hair cut, with associated uncontrolled demolition, _will
happen anyway._

A debt jubilee would do a lot to restore confidence, because everyone will be
able to stop looking nervously at everyone else's obligations and wondering if
they're going to be able to meet them. Instead, some realism will be restored
to book values.

This would still be cataclysmic, because the financial industry needs to
understand that it can no longer run on cocaine and bullshit.

But it won't be the financial equivalent of a self-inflicted nuclear strike,
which is a real possibility as things stand today.

~~~
forgetsusername
> _A debt jubilee would do a lot to restore confidence, because everyone will
> be able to stop looking nervously at everyone else 's obligations and
> wondering if they're going to be able to meet them._

Oh yeah, I'm sure the creditors will be _highly confident_ about future
lending after a jubilee, because they went from wondering _if_ debt will be
repaid...to _knowing it won 't_.

Where do people come up with this stuff?

~~~
anigbrowl
You know what, fuck the creditors. Let them feel what it's like to have no
money coming in for a while. If they don't want to lend any more they can
spend down their capital or go and get jobs. The society we've built around
the premise of mortgaging the future is not so fabulous that it can't be
improved upon.

~~~
gozur88
>You know what, fuck the creditors. Let them feel what it's like to have no
money coming in for a while.

I'll bet most of them already know. Start with nothing, work hard, save money
for retirement, lend it to entitled students and have them not only stiff you,
but also spit in your face.

That seems fair.

~~~
throwaway2048
most of the rentier class knows what its like to "start with nothing and work
hard"?

~~~
gozur88
We're not talking about "the rentier class", though. We're talking about
people who worked in a cubicle for the last 30 years and would like to be able
to spend the money they saved.

------
redthrowaway
Almost like the better part of a decade of free money tends to create bad
debt.

~~~
kolbe
On top of that, instead of getting rid of the people who issued bad debt ten
and twenty years ago, and let new people into the banking system, we instead
kept the same inept cleptocratic money managers in charge, but gave them more
firepower.

~~~
nickff
We also left the same regulators (who did nothing to forestall the Great
Recession) in place for good measure!

~~~
kolbe
The definition of insanity...

------
johnm1019
Wouldn't this only sap the global economy if all those bad loans were backed
by average Joes, who were then hurt by the loss of return? If instead they
were backed by governments and multi-national conglomerates who already had
hoardes of (free?) cash, then the effect on the economy would be limited.

~~~
simonh
Loans are 'non performing' precisely because whoever borrowed the money cannot
pay it all back, or even keep up with scheduled repayments. Generally that's
businesses, though they may be government owned. The article does discuss this
issue and the problems with the different methods of dealing with it.

------
marcusgarvey
One view: this article is "an economically warped account that leaves
important policy options off the table."

[http://www.nakedcapitalism.com/2016/02/new-york-times-
bank-b...](http://www.nakedcapitalism.com/2016/02/new-york-times-bank-
boosting-neoliberal-excusing-story-of-the-global-debt-hangover.html)

------
mathgenius
So, if one views the global financial system as a big distributed belief
propagation algorithm (eg. min-sum) how do loans fit into this?

Perhaps it makes sense switching to a "quantum-like" dynamics where one may
"borrow" energy for a short amount of time before having to repay it, as in
Heisenberg delta E * delta t uncertainty. So decreasing interest rates amounts
to messing with some kind of Planck's constant.

~~~
50CNT
This isn't quite a relevant xkcd, but I do think it's relevant. Whilst it'd be
cool to be able to apply models from physics to economics, there may be issues
in applicability. [http://www.smbc-
comics.com/index.php?db=comics&id=2556](http://www.smbc-
comics.com/index.php?db=comics&id=2556)

~~~
mathgenius
Very amusing.. Ouch.. But that tensor beef does look yummie!

I was just exploring an analogy, not particularly looking for any explanatory
power.

------
ChuckMcM
Reminds me of the joke, that if you can't pay your $100,000 loan you have a
problem, if you can't pay your $100,000,000 loan then the _bank_ has a
problem. But it captures the scale of things.

For literally decades people have suggested that China's economy (GDP) wasn't
growing, it's money supply was. And as a result there would be a time when
even with relaxed credit you could not justify adding any additional debt. At
which point that particular path would be cut off and a more accurate picture
of the economy would emerge. Which seems to be happening now.

What would be useful, but no doubt hard to get, would be a list of Chinese
firms which are currently technically in default on their loans and so at risk
of dissolution. And even more useful would be an understanding of how the
Chinese government would treat them (would they bail them out like our
government did for GM, or let them fail like Lehman Brothers?)

------
orian
Have to paste it: [http://i2.wp.com/armstrongeconomics.com/wp-
content/uploads/2...](http://i2.wp.com/armstrongeconomics.com/wp-
content/uploads/2015/02/World-Debts.jpg)

~~~
roymurdock
Debt is an obligation of repayment in the future. So technically it is money
that we owe our future selves and others. Of course, the future is uncertain,
which is what makes debt risky (and profitable). If we enter another
recession, much of that debt could default.

This idea of basically seeing into the future, pricing risk/rewards was what
always drew me to study finance. Sounds cool on paper, but the reality is much
messier and morally ambiguous.

------
markhall
Knowing that some of this will result in a partial economic downturn, how can
the 'average investor' hedge/profit from it? Not in a 'Big Short' sort of way,
just using this as an investment strategy for the layman. Any ideas?

~~~
nissimk
sell financials. buy alcohol producers and distributors

buy gold.

buy bitcoin? :-)

------
masterleep
This is flat out impossible. Krugman assured us that debts do not matter and
that trying to live within a budget is a wicked plot to impoverish us all.

~~~
clock_tower
Krugman also denies that the broken window fallacy is a fallacy -- he actively
thinks it's a good idea to destroy things (or produce shoddy goods) so that
you can get the economic stimulus of building them again. He may be famous,
but that doesn't mean he knows what he's talking about.

~~~
doyoulikeworms
Arguing whether or not Krugman is right or wrong about an issue is one thing,
but it's another to say that he doesn't know what he's talking about. He's a
Nobel laureate!

Is he really that bad? Or do you just disagree with him?

~~~
clock_tower
He's a Nobel laureate _who denies the Broken Window Fallacy_ (and who, to
reiterate the original poster's point, thinks that living within a budget is a
bad idea). If his ideas are that bad and he collects those kinds of honors
anyways, something's wrong with the Nobel Economics committee.

