It’s The End Of The World As We Know It, And I Feel Fine

Well, maybe not fine, since the global economy is completely, totally, and irredeemably fucked (only a household debt jubilee can save us!).  As we’ve been saying for a while around here, the future holds two decades, or more!, of deflation, defaults, bankruptcy, sovereign restructuring their social program obligations (Note that in the lingo of dominant creditor class, this is called “austerity” instead of “default” because the people they’re fucking are poor and middle class).  But let’s start with a comment from the Economist magazine:

The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity.

This special report will argue that, for the developed world, the debt-financed model has reached its limit. Most of the options for dealing with the debt overhang are unpalatable. As has already been seen in Greece and Ireland, each government will have to find its own way of reducing the burden. The battle between borrowers and creditors may be the defining struggle of the next generation.

Everyone get that? Let me just repeat that, “the defining struggle of the next generation.”  This is absolutely true.  The creditors don’t want to accept less that full repayment, and the debtors know that there is no fucking way in hell that they will ever be able to repay it.  So, what happens?  Well, the banksters trundle the world down the Road to Neoserfdom (read the whole thing):

On June 3, the World Bank reiterated the New Austerity doctrine, as if it were a new discovery: The way to prosperity is via austerity. “Rich counties can help developing economies grow faster by rapidly cutting government spending or raising taxes.” The New Fiscal Conservatism aims to corral all countries to scale back social spending in order to “stabilize” economies by a balanced budget. This is to be achieved by impoverishing labor, slashing wages, reducing social spending and rolling back the clock to the good old class war as it flourished before the Progressive Era.

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Somebody must take a loss on the economy’s bad loans – and bankers want the economy to take the loss, to “save the financial system.” From the financial sector’s vantage point, the economy is to be managed to preserve bank liquidity, rather than the financial system run to serve the economy. Government social spending (on everything apart from bank bailouts and financial subsidies) and disposable personal income are to be cut back to keep the debt overhead from being written down. Corporate cash flow is to be used to pay creditors, not employ more labor and make long-term capital investment.

The economy is to be sacrificed to subsidize the fantasy that debts can be paid, if only banks can be “made whole” to begin lending again – that is, to resume loading the economy down with even more debt, causing yet more intrusive debt deflation.

Pretty much right.  And the result?  First, John Hussman:

In short, my concerns about the economy and financial markets are escalating quickly. Given the already vulnerable condition of the U.S. economy, a second phase of weakness would most likely contribute to already troubling levels of mortgage delinquency and foreclosure, and could be expected to push the unemployment rate toward 12%. It is not useful to rule out unfavorable outcomes simply because they seem unpleasant or unthinkable. It is also not useful to place superstitious hope in the Fed and the Treasury to fix the consequences of irresponsible lending without any ill effect. In the coming quarters, remember that every time you hear an incomprehensibly large bailout commitment from government, it will equate to an unconscionably large extraction of public resources, possibly through overt taxation, but more likely through the long-term destruction of purchasing power.

I sincerely doubt, that we are going to a “long-term destruction of purchasing power,” unless he means that people won’t have any fucking money, and therefore can’t buy anything, but he’s right that we’re about to head into the biggest leg down yet.  Not to be outdone, however, is Paul Krugman:

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

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[B}oth the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

Now look, this is all playing out very much as we thought it would over here at AFEP, but that doesn't make it good.  Let's put what's happening in bullet point form as it is my preferred presentation method.

• We (the "citizens") can't pay off our mortgage, credit card, car, student loan, and other debt;
• The Government takes our tax dollars to make the banks and other creditors whole on the loans we can't afford to pay off;
• The Government then raises our taxes (not yet, but probably will) and cuts our social safety net to make up for the cost of making the banks whole;
• We (the "citizens") suffer a massive recession and severe increases in unemployment;
• We (the "citizens") - now because we don't have jobs or income - can't pay off even more mortgage, credit card, car, student loan, and other debt;
• Rinse, repeat, all the way down.

Of course, the way to cut off the cycle is to have the Government intervene at step one, and eliminate, or force a major write down of household debt, but, hey banks are in control of the government, and that might mean they would lose a few percentage points (or optimally, a lot of percentage points) to inflation.  And we can't have that.

So, crack open that bottle of tequila you've been saving for a special occasion because the great unwind is here.

Maybe the debt will go away in a few decades, or if we all stop paying, a little sooner, and the economy can begin to recover.  But I wouldn't get my hopes up.

Angryfutureexpat Plays Ann Landers

http://images.icanhascheezburger.com/completestore/2009/2/28/128803179567880077.jpg

Via email from Hardknocks, we have a query that was passed on us here at AFEP.  The email in full:

I just commented in response to another reader on your site. Frankly, debt is about out of control, and I’m looking for a solution. I do realize that fleeing to parts unknown is a move made in desperation, and, while I am in the kind of position which would require such a move, I am still skeptical that living abroad is a solution.

I have exactly zero moral or philosophical problems with just dropping the U.S. and my “obligations” to the student lenders, and I’m taking one last shot at some jobs here before just going with a Fall exit plan to teach English somewhere. I was lining up something with [REDACTED] in China, but it seemed to have been progressing too fast in comparison to a couple of other options I was pursuing.

Because I am concerned that I don’t exactly know what can happen if there is a default, I want to ask if you have any information on what the worst case scenario is. I would plan to do IBR with federal loans and pay my private loans as agreed, but if I became unable to pay on the private loans, what would be the worst that could happen? Do you know?

In particular, I want to know whether the only remedy available to lenders (absent a co-signer) is the 15% wage garnishment, even with a default judgment? Also, do you know if there is some minimum salary below which the lender is just completely out of luck (except for the spiteful move of trashing your credit score)? Is that pegged to U.S. standards of living, even if you’re overseas? I don’t know if you can answer these questions, but these are the ones most-pressing in my mind. Frankly, I could live with a 15% reduction on my salary. If that’s the worst that can happen, even assuming a default, then – in our circumstances – the lenders are all bark and no bite, aren’t they?

I’m sorry to keep bothering you, but if you can help me out – if you have better information than I have – it would be unbelievably useful.

Thanks.

There’s a lot of good stuff here.  First, congratulations on taking the first and most important step toward your freedom:

I have exactly zero moral or philosophical problems with just dropping the U.S. and my “obligations” to the student lenders,

Good, that’s the most important step.  Your lenders have taken a mercenary position toward you – lobbying to prevent bankruptcy discharge, lobbying against interest rate caps, lobbying for government guarantees – they don’t deserve so much as a second thought.  You can and should take exactly as mercenary a posture toward them as you can.  But here’s where things get difficult:

I do realize that fleeing to parts unknown is a move made in desperation, and, while I am in the kind of position which would require such a move, I am still skeptical that living abroad is a solution.

I am a strong supporter of moving overseas because, well, Americasux, but I have a few advantages that makes it an easy decision.  I have some money that I can access, I’ve lived overseas and know I like it, and I have contacts both here in the states and abroad that should make it possible for me to operate a business.  Not everyone has those advantages.  As I said in this post:

At least I had a solid decade where I had a fighting chance before being brought low by the financial meltdown.  I pity the current generation sitting in their classrooms, racking up student loan debt by the bushel, and sending their resumes off into vacuum.

Since I don’t know too much about your personal circumstances, let me make this suggestion.  Try it.  If you don’t like it don’t stay.  Go on IBR, put your private loans into forebearance, and move – take a job teaching English.  I’m no fan of China, but head on over.  If you like it, cut the cord, and stay forever.  Marry a local (or an American Expat!).  Even if you need to default to go, it’s likely still worth trying it out.  Which brings us to the next question.  What’s the worst that can happen?

Default in the U.S. is kind of like debtor’s prison, except the bars that keep you under control are your Social Security number, and computer databases operated by collection agencies all over the country.  That being said, default merely means that you lose a significant chunk of your income above starvation wages, and you lose all of your income if you ever want to move into the upper-middle class.  While I can’t personally vouch for this information (and it’s a bit dated), I have no reason to doubt it:

The maximum amount that can be garnished from your paycheck is the lower of the following:

25% of your disposable income if it’s greater than $262 ($290 after July 24, 2009).

Any amount greater than 30 times the federal minimum wage: $196.50 ($217.50 after July 24, 2009).

In other words, they can grab about a quarter of your earnings, and if you are as indebted as you seem to be, they will be taking that amount, pretty much your entire life.  The other thing is that they can grab 100% of earnings in excess of about 300k – calling Art Laffer, talk about a disincentive!  Default and wage garnishment sucks, but it’s survivable – as I mentioned in another post, Elie Mystal over at Above the Law has been having his wages garnished for a few years, and probably will for the rest of his life, and he’s still a pretty good blogger.

That being said, the real question which you don’t ask, is whether or not you should default.  And far be it from me to suggest that anyone do something they don’t want to do, but let me make this point.  The student loan regime in the United States is a perversion.  It perverts upward mobility.  It perverts comparative advantage seeking.  It perverts the incentives related to entrepreneurship.  And it perverts the very founding principles of the United States that we’re all created equal (really!).

It is a fundamentally unjust system.  Tuition is too high.  Creditors face no risk of default loss.  Debtors have no right to fail.  Millions of would-be entrepreneurs will never get off the ground because of Aunt Sallie’s collection goons.

And the way to deal with an unjust system is to simply not cooperate with it.  As Ghandi put it in the movie (and maybe he actually said this!):

GANDHI: Yes . . . in the end you will walk out. Because one hundred thousand Englishmen simply cannot control three hundred fifty million Indians if the Indians refuse to co-operate. And that is what we intend to achieve – peaceful, non-violent, non-co-operation.

By all means, take your own personal interests into account in deciding what to do, but know that defaulting and skipping the country is not only “ok” it is a profound and powerful act of civil disobedience.  One that you should be proud of.

(Update): This horror story reminds me that if you have co-signers, you need to take that into strong consideration.  But it is a further demonstration of the kind of Kafkaesque system we’re living under.

And AFEP’s helpful advice to all the parents and spouses out there, don’t ever, ever, ever, co-sign for someone else’s student loan.  Or any other kind of loan, but especially a student loan.

PROOF That Area 51 Exists!

Ok, not really, but we do have proof of something that is nearly as significant.  Proof that I don’t hate everyone associated with Wall Street I-banks – or banks generally.  Morgan Stanley analyst Richard Berner wrote up and released an 80-page report that concludes exactly what I’ve been saying for years – note that I have been saying it for years, but I’ve only been blogging about it for a few weeks.  Here’s the money quote as reported by Business Insider:

It is essential to reduce debt…

Of course, he adds a second clause that I strongly disagree with:

writing off bad loans while not destabilizing the financial system.

But at least he gets that it is debt (DEBT DEBT DEBT!) that is destroying the fabric of our society and debilitating the economy. He also points out the fundamental flaw in Timmeh et al.’s efforts to stem the foreclosure crisis:

Modifying existing mortgages seems appealing, but policies aimed at mitigating foreclosures under the Home Affordable Modification Program (HAMP) have not worked because they modify mortgage payments and not the amount of debt owed; re-default rates following modification are 50-60%.  Efforts to establish a protocol for short sales and/or principal reduction should be a useful tool in avoiding costly foreclosure and strategic default.

Or as I might say, Duh!  Significantly, the story also discussed the unemployment crisis and points to overleveraged and underwater homeowners as a key problem in undermining labor market mobility, which has long been a cushion in hard economic times.

America’s workers have always been footloose.  Even in the Great Depression, they looked for work wherever it was. Today, however, about one in four homeowners is trapped in their house because they owe more than the house is worth, so they can’t move to take another job — until they sell or walk away.  Unlike in the Depression, when homeownership was less prevalent, negative equity among a nation of homeowners leads to substantially lower mobility rates.

Hey, someone seems to get it.  That’s a start at least.

The Banksters Need You to Choose to Pay Them. So Don’t.

It’s an expensive pain in the ass for the banks to chase you down.  And, just as significantly, why the fuck should they care – the government bailed them out by guaranteeing their payment stream.  So, in the category of least surprising news ever we find this from the Washington Post:

Seeking alternatives to the nation’s struggling foreclosure prevention efforts, federal and mortgage industry officials increasingly are looking for ways to get distressed borrowers to leave their homes voluntarily, without going through the expensive foreclosure process or a messy eviction.

You’re probably thinking, “That’s strange.”  Why would the banksters try to help people ground under by massive debt, underwater mortgages, and a bankster-caused un/underemployment rate of 20%.  Seems mighty nice of them.  Of course, you need to read a little further to see the real reason:

Also, homeowners who owe far more than their homes are worth increasingly are choosing to “strategically default,” even though they can afford to pay their mortgage. The new program gives CitiMortgage more control over when distressed homes are put up for sale, bypassing clogged courthouses that have slowed the foreclosure process in many parts of the country.

Nice.

I applaud all of those who have strategically defaulted.  You have finally, finally gummed up the works enough that the banksters need to deal with people. Take a look at this chart which is cited in a post over at The Big Picture and illustrates the growing wedge between defaults and foreclosures.

See what’s happening there.  The more people default, the more difficult it is to foreclose.

I’ve said it and I’ll say it again, EVERYONE WHO IS UNDERWATER SHOULD DEFAULT IMMEDIATELY.  But not just on their mortgage, on credit cards, student loans, every debt that is owed to any bank or finance company.  There can be severe individual consequences (talk to a lawyer if you want), but mass default is the only way this fucking disaster of an economy will ever start moving again.