While driving my kids to school this morning I listened to David McWilliams talking on Newstalk radio. David was talking about the ECB/IMF “bailout” and about the growing mortgage crisis in Ireland. Now I have always respected David for his frankness and clearcut analysis. However this morning I disagreed with the duality in his argument.
On the ECB/IMF “bailout” he argued that this was not a bailout and that we as a population could never repay this loan. The interest payments would eat up 10% of our GDP and anyone considering this as something that would constitute a solution to our problems was wrong. He went on to state that a default was coming down the line and that it would be better to enter into a structured default now rather than have a systemic collapse further down the line when everything spins out of control and we have no choice in what happens. Furthermore the bondholders, who are the ones who benefit from this bailout, wilfully & knowingly bought these bonds hoping to make a high profit. They were also aware of the risks associated, or they should have been, and now it was time for them to be made face the risks of this type of business.
So far I agree with him.
He then went on to say that the best way to deal with the impending mortgage crisis is to create some sort of “debt forgiveness” scheme. One where people with negative equity would somehow not be held responsible for the chunk of money owed above the value of their house. People could not and should not be forced to pay their mortgages in full.
That’s where I disagree. Compare the first argument to the second;
- I am a bondholder and I buy quantities of bonds in a risky market hoping on a high return. The market goes the other way and I now have to face the truth that I am losing money.
- I have bought a house on a mortgage, as the value of my house increased I re-mortgaged it counting on the value to go up and up. Now reality has struck and the value of my house has plummeted (to a realistic value) and the amount of money that I owe is more than the property is worth. Or even better; I have bought a string of properties, all on a mortgage, have rented them out and was counting on the rent to pay the mortgage. I now have no tenants or tenants at a greatly reduced rent and owe more on the properties than that they are worth.
In McWilliams argument the party in the 1st argument should be forced to face the flip-side of their actions while the party in the 2nd argument should not be made to face the results of my risk and should get a huge chunk of my debt written off.
Not exactly fair in my opinion……