Thursday, December 01, 2011

Unleashing the Future: Advancing Prosperity Through Debt Forgiveness (Part 4)

This week we present a timely and important guest-author series on debt renunciation and forgiveness by longtime contributor Zeus Yiamouyiannis. Today: Part 4: Paying forward: Productivity principles and commitments.

Giving bankrupt entities the ability to borrow more money does not make them solvent, and so if we look past manic rallies in risk assets, we see that debt will still have to be renunciated, written down, forgiven, wiped off the books--whatever terminology you prefer. CHS

PART 4: Paying forward: Productivity principles and commitments

Simply put, “productivity” is giving to the future, instead of taking from the future.Parasitism is the opposite: Borrowing from the future to fund present desires without credible connection to future healthy growth. Successful productivity requires the development of beneficial new approaches to value creation and the rigorous identification and confrontation of approaches that destroy value and that destroy the environmental, financial, social, and personal fabric of human endeavor. Debt forgiveness is initially brought into play to address the latter requirement, but cannot be viable over the long haul without affirmative new ways to create and exchange value. Given that we have the collective integrity, self-preservation instinct, human will, and the sense of necessity to confront our broken system, let’s first establish philosophical and practical corollaries to guide debt forgiveness as “giving to the future instead of taking from it”:

1) Vitality and worth of debt forgiveness decisions and policies will be assessed on the opportunities they create broadly and systemically, not simply confine themselves to individual cases.

2) Debt forgiveness will support global health and significantly exceed “sustainable,” including creating surplus productivity and opportunity for future generations and not just mitigating current practices.

3) Debt forgiveness and subsequent laws will ensure future legal lending is tied to the success (productivity) rather than failure (parasitism) of the borrower and will not simply be offloaded to the government.

4) Debt forgiveness will promote autonomy and sovereignty not dependence.

5) Debt forgiveness will develop, utilize, and support the metric of actual “use value” over arbitrary mark-to-model “thing value.”

6) Debt forgiveness will have the requirement of breaking up monopolies standing in the way of a true discovery of “use value.”

Case applications of debt forgiveness that confront parasitism and reward productivity

With the Occupy Wall Street (OWS) movement people are beginning to turn their attention toward fully engaging society’s corrupted and powerful decision-makers and creating their own productive alternatives. Changing a system demands something greater from a citizen than merely voting. It means coordinated action on behalf of the public interest.

The recent success of 650,000 people “moving their money” (4.5 billion dollars) from “too big to fail” banks to local banks and credit unions offers a template of what coordinated effective citizen resistance and proactive alternatives might involve.

How can we effectively administer debt forgiveness that breaks our habit of stealing from the future and creates surplus in health and social wellness? The following examples will briefly analyze current primary debt arenas and dynamics, propose debt forgiveness strategies to confront parasitism (along with citizen strategies to break up monopolies responsible for most of the parasitism), and suggest viable alternatives going from the smallest to largest debt arenas—personal (credit cards), family (mortgages), generational (student loans), national (deficit spending), and global (environmental damage).

Credit cards: The personal is economic

Analysis: Consumer credit debt in America is currently about 0.8 trillion dollars. Two companies, MasterCard and Visa have a virtual monopoly on the processing end of consumer credit (with American Express and Discover rounding out the quartet) Credit card companies are multi-tens of billions of dollar businesses processing trillions in transactions that claim centrality to commerce because they ostensibly reduce transaction time and add ease, convenience, and record-keeping. However, they often are hugely parasitic, charging 3+% to businesses for using their service, 35 dollars for late fees, 30+% interest after missing a payment, and the list of excesses goes on.

With advancing technology, consumer charging and perhaps credit is becoming a relatively simple matter. It certainly would be possible to replace especially the debit function, break up the monopolies, and keep the convenience. Too many people are dependent upon consumer credit to pay for necessities like food, rent, medical care, and even education, so that must be addressed in debt forgiveness around consumer credit.

Intervention: Allow for (and protect/promote the right of) people to file for bankruptcy and discharge their credit card debt completely. If credit companies played fast and loose for on-paper profits and stepped up interest rates, then they should experience the consequences of overreach, i.e. default. Next time they should do a better job at ensuring collateral, looking at income, and being judicious with credit lines. The consequence for the consumer is a bad credit rating and the possibility of being refused future credit.

Credit companies can strike a deal to settle part of the debt in exchange for a preserved credit rating. That is already done now. The point is to wean people from unnecessary credit. For those who rely on revolving credit to meet basic life needs, communities can help by creating local currency based surplus supply and exchange networks for housing, food, certain medical care, and other necessities Making a Living vs. Making a Killing: Creating a Healthy Democratic Foundation for Economies (Part 2).

Going forward, it may simply be beneficial to cut out transnational corporations altogether, and once again re-awaken the tradition of local tabs for goods and services. For online purchases, there is an increasing array of charging options, and more could be developed by savvy citizens, non-profits, and start-ups.

Mortgages: Indentured families

Analysis: According to U.S. census data, mortgage debt totaled 13.8 trillion dollars at the end of 2010, 9.3% of which is delinquent (or about 1.3 trillion). With money like that in play and almost zero regulation, it is no wonder that housing was ripe for extreme manipulation. Between skyrocketing prices driven by easy credit, appraisal fees, tax revenue gains, transfer fees, etc., there was a lot of incentive to let the crooked times roll.

Now we have a full-blown extended housing bust with banks hiding the true nature and value of their mortgage loan “assets” turned liabilities. Homeowners are being caught in a no-man’s land of being unable to renegotiate reasonable principle reductions or tenably refinance, and taxpayers are being asked to backstop the housing debacle through government agencies like Fannie Mae and Freddie Mac to the tune of hundreds of billions of dollars. House sales are depressed. Nothing’s moving. People are holding their collective breath. Many predict and fear hysterical overshoots in housing prices to the downside. Government policies seem intent on trying to reinflate housing prices.

Intervention: It doesn’t seem prudent to simply encourage everyone who cannot pay the current mortgage to default and remove all pricing controls and force the selling off mortgage-related assets to get at the “true value” of unsold and defaulted inventory. Prices probably would crater. Panic likely would ensue, leading to a disordered cascade of insolvencies. However, we cannot stay where we are and tread water for a couple of decades nor can we reinflate the housing bubble. A kind of “middle path” debt forgiveness might be the reasonable course here.

Why not simply establish as part of debt forgiveness a coordinated common metric that housing be pegged to the inflation index for affected regional markets. Housing has followed that inflation index almost to a tee in the last 100 years. This is another way of saying that houses and land do not, in fact, gain relative value, but merely increase in price to keep even with dollar purchasing power. Land and houses in this scenario become a maintenance store of value, then, and not a phony producer of increased value.

Peg the loan interest rates for underwater homeowners to the bank savings rates (which are now almost zero), and add in only reasonable loan servicing costs. The point here is to break even, and move inventory in such a way that neither advantages nor disadvantages parties. If banks become insolvent in this arrangement, then they need to be taken into receivership and processed by the appropriate regulatory agencies.

Homeowners who cannot pay in the new value scale will default and move out. Others will have lower payments, but their homes will be worth nominally less asset-wise. These latter homeowners will have already suffered a hit and learned a lesson about living within their means in the inflated payments and interests they’ve already made. Houses that took advantage of this program would be price and time percent limited on subsequent ownership transfers and rental rates to prevent abuse and to allow more diverse populations to vie for housing in particular areas.

If one then eliminates government tax subsidies associated with mortgage interest, and proposes only fees associated with maintaining and servicing homes (municipal taxes, loan administration overhead, etc.), you have a fairly reasonable approximation of value, a "growth" in price which primarily maintains purchasing power of dollar, but adds no phony or subsidized "wealth". A house becomes something to live in. Nothing added. Nothing taken away. This is consistent with the principle that in the interest of quality of life necessities like basic food, housing, clothing, water, and medical care should not be treated as cash cows.

Moving forward as citizens, instead of focusing on the nominal asset value in home ownership, there is an opportunity here to focus on use-value: “How much does this or that obligation or opportunity support my larger, deeper physical, financial, mental, and spiritual health?”

If the nominal price of a house is too high to keep one out of debt slavery and directly serve deeper purposes, then one set of options is to refuse to buy it, or sell it. Its use value is negative. Instead, share a house, invest in a housing cooperative, or rent a house within your means. Even a house that has lost “thing” value (asset value), has largely maintained its “use value”. By focusing on use value we can combat the human penchant to psychologically obsess over the roller coaster of nominal asset gains and losses.

Sales commissions, especially large ones, invite skewed risk evaluation, conflict of interest, and price inflation. For this reasons reputable sources will always advise potential customers to get a flat-fee or hourly rate professional for financial planning. However, the same logic holds true for realtors and mortgage brokers. To break up those monopolies, citizens could team up to insist on flat-rate assisted selling/buying and to create Wiki-like databases making house purchase information fully transparent and available (in a way that goes beyond MLS listings and National Association of Realtor propaganda).

In addition circle and peer-to-peer lending could be developed further with technology and updated practices to create a pathway around banks and brokers in financing a home. These moves could significantly increase housing market volume and mobility by decreasing transaction costs and eliminating dependence on middlemen.

Student loans: Generational con games

Analysis: Total university student loan debt just recently passed the one trillion dollar mark in the United States, eclipsing the 100 billion mark in 2010 alone. College tuition has risen 7.45%/year in compounded terms since 1978, doubling the inflation rate and far outpacing the already outrageous increases health care costs.

It seems astounding that something, higher education, so intrinsic to personal growth, economic well-being, and the viable future of the world has been held hostage by a monopoly consortium of public and private “higher” education institutions charging such exorbitant and unjustified prices.

No one seems to be advocating for the student. If anything it’s the opposite—an incentive for turnover and student failure is being established. Predatory private lenders gain greater profits through collector’s fees and penalties if students default. Then they send the hollowed-out remainder off to the government guarantor. For-profit colleges like Phoenix University get to keep semester tuition payments even if a student drops out after four weeks. These private agents don’t care how inflated their promises were. They have the students’ money. Legislators don’t seem to seriously care either, since they can use taxpayer money to backstop student loan default after they promise better deals to young voters.

Today’s college students graduate with record debt and enter a world of unprecedented economic contraction. The promised high-paid jobs are not there. Even many of the fairly low-paying entry-level jobs are scarce. An entire generation of aspiring youth is being set up for life-time debt slavery unless some form of debt forgiveness can be worked out.

President Obama’s recent “Pay as You Earn” plan to re-gauge repayment of student debt seems to have some valid ideas like basing loan repayment on a percent of income (10%) and limiting student debt horizon to a maximum number of years. However it only covers debt incurred since 2008 for people who have not yet graduated college. It thus excludes a vast majority of young debtors and nearly all of the current trillion dollars of student loan debt. That is not forgiveness; it’s vote-appeal rhetoric that does not actually challenge the parasitic players.

Intervention: Is there an alternative in the near term? Is there an option besides civil resistance and unilateral intentional default unilateral intentional default? Effective debt forgiveness and applicable policy have to bring everyone in as stakeholders in the post-graduate success of college students and, thus, the larger society that depends upon productive citizens. It also has to recognize and align debt payment with economic productivity curves and economic contingencies instead of simply trying to extract more from the borrower regardless of context.

This means due diligence, support, and re-negotiation if necessary. Private loans should not be government guaranteed, and they should exert the same lending standards as those required for a small business loan. Government loans, especially for financially riskier or disadvantaged students, might accept non-financial productivity currency as debt payment (i.e. pro-social work as a national volunteer).

Colleges who dramatically underperform on their promises and to industry standards should be required to refund a portion of the tuition they received, the same as any business would with defective merchandise. In principle, each student should be granted the opportunity to pay off student loans as percentage of income ending in complete forgiveness after a fixed term (pro-rated to total debt) or erase student debt altogether in exchange for specified pro-social volunteer work.

Going forward, I believe the best way to attack this problem of ballooning, onerous student debt is to preclude the debt in the first place by creating competitive alternatives to the current monopolies of high-priced lending and low-delivery higher education. Why not have community sponsorship for students who commit to coming back and sharing their skills, as we sometimes see for rural doctors?

Why not take advantage of circle and peer lending to borrow from pools of citizen-invested capital and cut out parasitic private lending? Why not develop and accredit alternative education which focuses on practical application of knowledge and makes professional certification a customized process of achieving certain high standards on publically available tests, internships, and practicums, thus rewarding outcomes and innovative, time-saving, and accessible learning?

by Zeus Yiamouyiannis, Ph.D., copyright 2011. All opinions presented in this essay are solely those of the author.




Unleashing the Future: Advancing Prosperity Through Debt Forgiveness (Part 3)(November 30, 2011)



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