Archive for July 16th, 2012

Debt Forgiveness Prompts Economic Recovery … No, Not in America

On August 3, 2010, I argued, here, that we should reduce the principal on every mortgage in America such that no owner-occupied homeowners were underwater.  I believed – and still believe – that forgiving debt for every-day Americans would help America’s economy far more than bailing out the banks.  Unfortunately, my theory has never been put to the test, as virtually every country in the world has followed America’s approach of bailing out the banking industry and refusing to write down principal balances on underwater mortgages.   Virtually every country, that is, but Iceland.

So let’s get this straight … the American government has steadfastly refused to engage in any widespread effort to write down principal on mortgages, instead choosing to help the banks … and our economy remains in the toilet.  How do you think Iceland’s economy is doing, having decided to help homeowners and let the banks fail?

Perhaps not surprisingly, according to this recent article in the New York Times, Iceland is doing just great.  Why, exactly, is that?  Well, I don’t pretend to be an expert on Iceland’s economy, but to quote the article:

During the crisis, Iceland did many things differently from its European counterparts. It let its three largest banks fail, instead of bailing them out. It ensured that domestic depositors got their money back and gave debt relief to struggling homeowners and to businesses facing bankruptcy.

You mean Iceland is doing better when it didn’t bail out the banks and gave debt relief to struggling homeowners?  Really?  You don’t say?  I find this just absolutely impossible to believe.  Do you really mean to say that when a country doesn’t spend billions upon billions bailing out the banks, and instead gives relief to struggling homeowners, that said country’s economy turns around faster?  I’m shocked, shocked I tell you.  Or not.

By the way, how pathetic is it that our country is still suffering through an awful recession, and this is an election year, yet we hear absolutely nothing about even the possibility that any candidate would consider pushing a platform with principal reductions?

Mark Stopa

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