Via Zerohedge, a suit has been filed in the US district court for western North Carolina by a group of citizens alleging that the Federal Reserve is an unconstitutional cartel and Ponzi scheme. Also named as defendants are several large banks and their CEOs, Geithner, Bernanke, Hank Paulson, Greenspan, John Snow, Shiela Bair and several other hacks and oligarchs.
The suit enumerates various “evils” committed over the last 97 years, but reaches way too far and dilutes the case by stringing together an overarching theory of a grand plot against the American way. Since it doesn’t stick to clear-cut issues of constitutionality such as the legal tender laws it is unlikely to get traction, but there can’t be a better place for it than in Western NC.
I take it as a sign of the times. It’s heartening to see people channel their anger about the economy into the study of banking history and take action that will at least open some more eyes.
Forget the middlemen – the real criminals are those who betray their oaths of office.
Via the Motley Fool, here is an email from someone inside John Paulson’s hedge fund:
It is true that the market is not pricing the subprime RMBS [residential mortgage-backed securities] wipeout scenario. In my opinion this situation is due to the fact that rating agencies, CDO managers and underwriters have all the incentives to keep the game going, while ‘real money’ investors have neither the analytical tools nor the institutional framework to take action before the losses that one could anticipate based [on] the ‘news’ available everywhere are actually realized.
The charts below come via Mish’s post today on why it doesn’t matter that Bernanke wants to eliminate bank reserve requirements. The quick answer: Greenspan already did that in 1994 when he allowed overnight sweeps on checking accounts to free them from reserve requirements just like savings accounts. In this era, banks lend first and look for reserves later.
Anyway, way back in 2007 I first became convinced that this would be a deflationary depression because of this simple equation: there was $52 trillion in outstanding debt in the US, and only (at the time) $850 billion in base money (all the “cash” that the Fed had created since it was founded in 1913). As defaults and write-downs started to reduce the amount of debt, the Fed was likely to create new money to bail out banks and monetize deficits. It was plain to see that the difference in scale betwean the two pools, debt and cash, would tip the scales in favor of deflation, along with a shift in attitude towards frugality and a new respect for the value of a dollar.
Well, here we are in 2010, and the Fed has indeed created a fresh $1.2 trillion, but the debt pile has stopped growing over the last year, even taking into account the massive issuance of treasury debt. This chart comes from Karl Denninger:
I suspect that if properly marked to market, the private debt figures (household, business credit and financial instruments) would be considerably lower. There is a lot of pretending going on at banks, since they do not want to take write-downs. How much of that household credit card and mortgage debt will really be paid off?How much of those financial instruments are junk (and even investment-rated) bonds that will be defaulted on in the next few years? How many business loans are in arrears or just barely being made?
On the other side of the equation, here is the base money supply since 1999:
If reserve ratios mattered, wouldn’t debt have at least doubled (or more if you believe in the multiplier effect)? The fact is, nobody who can handle a loan wants one, and nobody who wants one can handle it.
Credit conditions and risk appetite are what drive lending, not reserves. Banks simply don’t hold reserves anymore, which is why bubbles get so out of hand and why they are always a few bad loans away from bankrupcy. If bankers’ asses and depositors’ funds were on the line like in the 1800s, you better believe banks would hold reserves. Depositors would sniff out those that tried to scimp, and take their funds elsewhere, nipping any trouble in the bud. Busts were frequent and localized, and freed up capital for productive hands. That’s why that era produced the greatest improvement in living standards and real GDP growth of 3-4% while prices were steady to falling for decades.
Here’s another chart that shows our state of debt saturation from Nathan’s Economic Edge. GDP no longer grows with debt — this is the point of no-return where interest can no longer be serviced with production, so the whole thing starts to collapse.
Taleb thinks hyperinflation is a strong enough possibility to justify way OTM bets on gold (long) and bonds (short). The one bit I agree with is the long gold / short stocks play (though I think gold is likely to fall with stocks, just not as much), and I suspect that deflationist Hendry would concur.
Hendry thinks that deflation is here to stay, that nations will start to default, and that the market will at least start to worry about sovereign defaults by nations like Germany and the US (even if they don’t actually default, he’ll make money in that situation as the price of insurance goes up).
(The video cuts off when Hendry passes the mic, and I don’t have a link to the rest. If anybody else does, please post it.) (EDIT: http://2010.therussiaforum.com/news/session-video3/ Minute 24:00 and after. Thanks Charles!)
Hendry makes a point I’ve made myself: the euro is like gold for countries like Greece (they can’t print it) so it will have to default.
Hendry says his porfolio is inspired by Nassim, but basically the opposite. He’s fed up with other people’s opinions. The hedge fund guys are “so uncool.” He doesn’t talk to brokers, and he reads nobody else’s research.
Debt loads are bound to squeeze all of the vitality out of the risk takers in the market.
UK interest rates are at the lowest since the Bank of England was established in 1692. He is betting that the central banks won’t raise rates in the next 4 months and he will make 4x his dough if right.
He thinks the sovereign default scenario today is like the mortage bond situation three years ago.
Now, who is the true contrarian? Is hyperinflation really a black swan right now? Every chat board on the net has been buzzing about it for years. When Taleb said every human being should short treasuries, every human being agreed with him!
A friend just sent me a link to this excerpt of Michael Lewis’s new book, The Big Short. It’s the chapter about Michael Burry, a California recluse who emersed himself in mortgage bond prospectuses, figured out that it was an historic bubble, and then convinced Goldman and other TBTF banks to write his value fund several hundred million in swaps on the very worst securities.
The amazing part of this story is that seemingly nobody else was planning for these things to blow up back in 2004-2005 when Burry was first buying his swaps. Not even Goldman’s traders, nor John Paulson (who entered the game a year after Burry). The party atmosphere was so thick on Wall Street that nobody was looking around the hump. I’ll admit that not even I was until mid-to-late 2005, when I finally had read enough about financial history and our monetary system to start to get the feeling that it was all a house of cards.
Anyway, here’s an excerpt. I’ll probably be reading Lewis’ book soon. He’s the best modern financial storyteller, IMO:
The subprime-mortgage market had a special talent for obscuring what needed to be clarified. A bond backed entirely by subprime mortgages, for example, wasn’t called a subprime-mortgage bond. It was called an “A.B.S.,” or “asset-backed security.” If you asked Deutsche Bank exactly what assets secured an asset-backed security, you’d be handed lists of more acronyms—R.M.B.S., hels, helocs, Alt-A—along with categories of credit you did not know existed (“midprime”). R.M.B.S. stood for “residential-mortgage-backed security.” hel stood for “home-equity loan.” heloc stood for “home-equity line of credit.” Alt-A was just what they called crappy subprime-mortgage loans for which they hadn’t even bothered to acquire the proper documents—to, say, verify the borrower’s income. All of this could more clearly be called “subprime loans,” but the bond market wasn’t clear. “Midprime” was a kind of triumph of language over truth. Some crafty bond-market person had gazed upon the subprime-mortgage sprawl, as an ambitious real-estate developer might gaze upon Oakland, and found an opportunity to rebrand some of the turf. Inside Oakland there was a neighborhood, masquerading as an entirely separate town, called “Rockridge.” Simply by refusing to be called “Oakland,” “Rockridge” enjoyed higher property values. Inside the subprime-mortgage market there was now a similar neighborhood known as “midprime.”
But as early as 2004, if you looked at the numbers, you could clearly see the decline in lending standards. In Burry’s view, standards had not just fallen but hit bottom. The bottom even had a name: the interest-only negative-amortizing adjustable-rate subprime mortgage. You, the homebuyer, actually were given the option of paying nothing at all, and rolling whatever interest you owed the bank into a higher principal balance. It wasn’t hard to see what sort of person might like to have such a loan: one with no income. What Burry couldn’t understand was why a person who lent money would want to extend such a loan. “What you want to watch are the lenders, not the borrowers,” he said. “The borrowers will always be willing to take a great deal for themselves. It’s up to the lenders to show restraint, and when they lose it, watch out.” By 2003 he knew that the borrowers had already lost it. By early 2005 he saw that lenders had, too.
A lot of hedge-fund managers spent time chitchatting with their investors and treated their quarterly letters to them as a formality. Burry disliked talking to people face-to-face and thought of these letters as the single most important thing he did to let his investors know what he was up to. In his quarterly letters he coined a phrase to describe what he thought was happening: “the extension of credit by instrument.” That is, a lot of people couldn’t actually afford to pay their mortgages the old-fashioned way, and so the lenders were dreaming up new financial instruments to justify handing them new money. “It was a clear sign that lenders had lost it, constantly degrading their own standards to grow loan volumes,” Burry said. He could see why they were doing this: they didn’t keep the loans but sold them to Goldman Sachs and Morgan Stanley and Wells Fargo and the rest, which packaged them into bonds and sold them off. The end buyers of subprime-mortgage bonds, he assumed, were just “dumb money.” He’d study up on them, too, but later.
He now had a tactical investment problem. The various floors, or tranches, of subprime-mortgage bonds all had one thing in common: the bonds were impossible to sell short. To sell a stock or bond short, you needed to borrow it, and these tranches of mortgage bonds were tiny and impossible to find. You could buy them or not buy them, but you couldn’t bet explicitly against them; the market for subprime mortgages simply had no place for people in it who took a dim view of them. You might know with certainty that the entire subprime-mortgage-bond market was doomed, but you could do nothing about it. You couldn’t short houses. You could short the stocks of homebuilding companies—Pulte Homes, say, or Toll Brothers—but that was expensive, indirect, and dangerous. Stock prices could rise for a lot longer than Burry could stay solvent.
A couple of years earlier, he’d discovered credit-default swaps. A credit-default swap was confusing mainly because it wasn’t really a swap at all. It was an insurance policy, typically on a corporate bond, with periodic premium payments and a fixed term. For instance, you might pay $200,000 a year to buy a 10-year credit-default swap on $100 million in General Electric bonds. The most you could lose was $2 million: $200,000 a year for 10 years. The most you could make was $100 million, if General Electric defaulted on its debt anytime in the next 10 years and bondholders recovered nothing. It was a zero-sum bet: if you made $100 million, the guy who had sold you the credit-default swap lost $100 million. It was also an asymmetric bet, like laying down money on a number in roulette. The most you could lose were the chips you put on the table, but if your number came up, you made 30, 40, even 50 times your money. “Credit-default swaps remedied the problem of open-ended risk for me,” said Burry. “If I bought a credit-default swap, my downside was defined and certain, and the upside was many multiples of it.”
He was already in the market for corporate credit-default swaps. In 2004 he began to buy insurance on companies he thought might suffer in a real-estate downturn: mortgage lenders, mortgage insurers, and so on. This wasn’t entirely satisfying. A real-estate-market meltdown might cause these companies to lose money; there was no guarantee that they would actually go bankrupt. He wanted a more direct tool for betting against subprime-mortgage lending. On March 19, 2005, alone in his office with the door closed and the shades pulled down, reading an abstruse textbook on credit derivatives, Michael Burry got an idea: credit-default swaps on subprime-mortgage bonds.
The idea hit him as he read a book about the evolution of the U.S. bond market and the creation, in the mid-1990s, at J. P. Morgan, of the first corporate credit-default swaps. He came to a passage explaining why banks felt they needed credit-default swaps at all. It wasn’t immediately obvious—after all, the best way to avoid the risk of General Electric’s defaulting on its debt was not to lend to General Electric in the first place. In the beginning, credit-default swaps had been a tool for hedging: some bank had loaned more than they wanted to to General Electric because G.E. had asked for it, and they feared alienating a long-standing client; another bank changed its mind about the wisdom of lending to G.E. at all. Very quickly, however, the new derivatives became tools for speculation: a lot of people wanted to make bets on the likelihood of G.E.’s defaulting. It struck Burry: Wall Street is bound to do the same thing with subprime-mortgage bonds, too. Given what was happening in the real-estate market—and given what subprime-mortgage lenders were doing—a lot of smart people eventually were going to want to make side bets on subprime-mortgage bonds. And the only way to do it would be to buy a credit-default swap.
Here’s a part that really struck me. In spring 2007, before the stock market even made its highs, while the VIX was messing around with single digits, the banks were already in a panic about what they finally could see coming:
Ithe spring of 2007, something changed—though at first it was hard to see what it was. On June 14, the pair of subprime-mortgage-bond hedge funds effectively owned by Bear Stearns were in freefall. In the ensuing two weeks, the publicly traded index of triple-B-rated subprime-mortgage bonds fell by nearly 20 percent. Just then Goldman Sachs appeared to Burry to be experiencing a nervous breakdown. His biggest positions were with Goldman, and Goldman was newly unable, or unwilling, to determine the value of those positions, and so could not say how much collateral should be shifted back and forth. On Friday, June 15, Burry’s Goldman Sachs saleswoman, Veronica Grinstein, vanished. He called and e-mailed her, but she didn’t respond until late the following Monday—to tell him that she was “out for the day.”
“This is a recurrent theme whenever the market moves our way,” wrote Burry. “People get sick, people are off for unspecified reasons.”
On June 20, Grinstein finally returned to tell him that Goldman Sachs had experienced “systems failure.”
That was funny, Burry replied, because Morgan Stanley had said more or less the same thing. And his salesman at Bank of America claimed they’d had a “power outage.”
“I viewed these ‘systems problems’ as excuses for buying time to sort out a mess behind the scenes,” he said. The Goldman saleswoman made a weak effort to claim that, even as the index of subprime-mortgage bonds collapsed, the market for insuring them hadn’t budged. But she did it from her cell phone, rather than the office line. (Grinstein didn’t respond to e-mail and phone requests for comment.)
They were caving. All of them. At the end of every month, for nearly two years, Burry had watched Wall Street traders mark his positions against him. That is, at the end of every month his bets against subprime bonds were mysteriously less valuable. The end of every month also happened to be when Wall Street traders sent their profit-and-loss statements to their managers and risk managers. On June 29, Burry received a note from his Morgan Stanley salesman, Art Ringness, saying that Morgan Stanley now wanted to make sure that “the marks are fair.” The next day, Goldman followed suit. It was the first time in two years that Goldman Sachs had not moved the trade against him at the end of the month. “That was the first time they moved our marks accurately,” he notes, “because they were getting in on the trade themselves.” The market was finally accepting the diagnosis of its own disorder.
It was precisely the moment he had told his investors, back in the summer of 2005, that they only needed to wait for. Crappy mortgages worth nearly $400 billion were resetting from their teaser rates to new, higher rates. By the end of July his marks were moving rapidly in his favor—and he was reading about the genius of people like John Paulson, who had come to the trade a year after he had. The Bloomberg News service ran an article about the few people who appeared to have seen the catastrophe coming. Only one worked as a bond trader inside a big Wall Street firm: a formerly obscure asset-backed-bond trader at Deutsche Bank named Greg Lippmann. The investor most conspicuously absent from the Bloomberg News article—one who had made $100 million for himself and $725 million for his investors—sat alone in his office, in Cupertino, California. By June 30, 2008, any investor who had stuck with Scion Capital from its beginning, on November 1, 2000, had a gain, after fees and expenses, of 489.34 percent. (The gross gain of the fund had been 726 percent.) Over the same period the S&P 500 returned just a bit more than 2 percent.
Michael Burry clipped the Bloomberg article and e-mailed it around the office with a note: “Lippmann is the guy that essentially took my idea and ran with it. To his credit.” His own investors, whose money he was doubling and more, said little. There came no apologies, and no gratitude. “Nobody came back and said, ‘Yeah, you were right,’” he said. “It was very quiet. It was extremely quiet.”
This era was being sold to the public as the Goldilocks perfection, when Hank Paulson said he had never seen such a strong global economy, and Chuck Prince said Citigroup was “still dancing”. They were apparently lying through their teeth.
According to Bloomberg, the big bears are circling China.
Marc Faber, publisher of the Gloom, Boom & Doom Report, says China is overdoing it. “It does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity,” Faber told Bloomberg Television on Feb. 11. “I think the Chinese economy will decelerate very substantially in 2010 and could even crash.”…
…The costs of wasteful investments in empty offices and shopping malls and in underutilized infrastructure will weigh on China, Chanos, president of New York-based Kynikos Associates Ltd., said in a speech at the London School of Economics. “We may find that that’s what pops the Chinese bubble sooner rather than later.”…
Risk for Commodities
Last month, banks lent a further 1.39 trillion yuan — almost one-fifth of the target amount for the whole of 2010. Also in January, foreign direct investment climbed 7.8 percent to $8.13 billion. Retail sales during last week’s Lunar New Year holiday rose 17.2 percent from the same period in 2009, according to the Ministry of Commerce.
While China’s resilience has helped support the world economy, raising demand for energy and raw materials, the bursting of a bubble would have the opposite effect. Government efforts to wean the economy off its extraordinary support may roil markets.
In January, the central government ordered banks to curb lending, which put China’s stock market into reverse. In a sign, in part, of how dependent the world has become on China, stocks and currencies slumped in places such as Australia and Brazil that supply commodities to the People’s Republic. On Feb. 12, the eve of the one-week Lunar New Year holiday, China for the second time in a month ordered banks to set aside more deposits as reserves. The Shanghai Composite Index has fallen 8 percent year-to-date, after gaining 80 percent in 2009.
Bidding Up Prices
“If the Chinese economy decelerates or crashes, what you have is a disastrous environment for industrial commodities,” said Faber, who oversees $300 million at Hong Kong-based Marc Faber Ltd.
The stimulus tap that Beijing turned on has flowed to projects such as its 2 trillion yuan high-speed-rail network. The 221 billion yuan Beijing-Shanghai line has surpassed the Three Gorges Dam as the single most expensive engineering project in Chinese history.
Some beneficiaries of the government efforts have plowed their loans into real estate and stocks. Property prices across 70 cities jumped 9.5 percent in January from a year earlier, according to government data.
…Chanos, a short-seller who was early to warn about Enron Corp., is one of a growing number of investors sounding the alarm. “Right now, the Chinese market is overheating,” George Soros said in a Jan. 28 interview.
Wait, I thought Soros was a Keynesian. Isn’t printing and spending the way to perpetual prosperity?
Another example Chanos has cited is the city of Ordos, where party officials have built an entire new downtown on the windswept grasslands of Inner Mongolia, 25 kilometers (15 miles) outside the existing municipality of 1.5 million people.
Ordos is really comedic. Check out this video:
Kevin Duffy and Bill Laggner are acquaintances of mine who run the Bearing Fund, which returned high double digits for its investors in 2008. Their moral and economic philosophy is grounded in the Austrian understanding of the credit cycle and the parasitic role that government plays in today’s economy. I highly recommend an interview with them in this week’s Barrons (subscription only). Here are some excerpts:
Duffy: Any healthy system needs a way to correct error and remove waste. Nature has extinction, the economy has loss, bankruptcy, liquidation. Interfering in this process lengthens feedback loops. Error and waste are allowed to accumulate, and you ultimately get a massive collapse.
Capitalism is primarily attacked by two groups: utopians who wish to impose a more “compassionate” system, and political capitalists who want to enjoy the fruits of success without bearing the pain of failure. They use the coercion of the state to gain privileges, at the expense of everyone else.
As a country we’ve become less tolerant of economic failure. The result has been a series of interventions, such as meddling in the credit markets, promoting homeownership and creating a variety of safety nets for investors. Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable. The interventionists never see the bust coming, then blame it on “capitalism.” …
Laggner: AIG made sure its creditors received 100 cents on the dollar. Essentially you have the socialization of risk, but the survivors are still highly leveraged. There is still a multi-trillion dollar shadow banking system that FASB [the Financial Accounting Standards Board] wants to address next year. The central planners have already spent $3.15 trillion on various bailouts, credit backstops, guarantees, etc., and given approximately $17.5 trillion of government commitments, etc., while allowing many of these institutions to remain in place, with the same people running them…
Barron’s: What kind of financial reform would you like to see?
Laggner: We don’t believe in a central bank. The idea that banks can speculate with essentially free money from the [Federal Reserve], which ultimately is the taxpayer, and that when they lose money the Fed bails them out and then passes that invoice to the taxpayer — that whole model is broken and needs to go away.
Duffy: To get to the heart of the problem, we need to address fractional-reserve banking, which is causing the instability. We have essentially socialized deposit insurance and prevented the bank run, which used to impose discipline on this unstable system. At least it had some check on those who were acting most recklessly. Until we address the root of the problem, we are going to have a series of crises, greater responses and intervention, and more bubbles — and the system will keep perpetuating itself.
The whole system is broken and needs to go away. We can only hope that this depression fosters that end, though the actors that control the guns (i.e. government) will use all of their wiles to hold onto their racket.
Yes, the 1700s and 1800s had their booms and busts, but the 200 years leading up to the first world war saw the greatest improvement in living standards that the world has ever seen. The industrial revolution and development of modern communications, medicine and transportation happened on the gold standard, with non-existent or non-interventionist central banks and governments that allowed busts to clear away mal-investments and bad debts so that the market could guide capital and labor into productive hands.
Nobody back then believed that consumption and “stimulous” could generate anything but debt and waste. Since the ruinous economic policies of the 20th century took hold, we have been squandering our wealth and merely coasting on technological improvements, which government only impedes in a thousand ways.
Thomas Woods, Jr., PhD, Prepared Testimony in Support of HR 1207, The Federal Reserve Transparency Act of 2009, House Financial Services Committee, September 25, 2009:
There is no good reason for Americans not to know the recipients of the Fed’s emergency lending facilities. There is no good reason for them to be kept in the dark about the Fed’s arrangements with foreign central banks. These things affect the quality of the money that our system obliges the American public to accept.
The Fed’s arguments against the bill are unlikely to persuade, and will undoubtedly strike the average American as little more than special pleading. Perhaps the most frequent of the claims is that a genuine audit would jeopardize the alleged independence of the Fed. Congress could come to influence or even dictate monetary policy.
This is a red herring. The bill is not designed to empower politicians to increase the money supply, choose interest-rate targets, or adopt any of the rest of the Fed’s central planning apparatus, all of which is better left to the free market than to the Fed or Congress. It seeks nothing more than to open the Fed’s books to public scrutiny. Congress has a moral and legal obligation to oversee institutions it brings into existence. The convoluted scenarios by which merely opening the books will lead to an inflationary catastrophe at the hands of Congress are difficult to take seriously.
At the same time, as we hear this objection repeated time and again, we might wonder just how independent the Fed really is, what with its chairman up for reappointment by the president every four years. Have these critics never heard of the political business cycle? Fed chairmen have been known to ingratiate themselves into the president’s favor close to election time by means of loose monetary policy and the false (and temporary) prosperity it brings about. Let us not insult Americans’ intelligence by pretending this phenomenon does not exist…
If there is any truth to the idea of Fed independence, it lay in precisely this: the Fed may reward favored friends and constituencies with trillions of dollars in various kinds of assistance, while keeping the public completely in the dark. If that is the independence we’re talking about, no self-respecting American would hesitate for a moment to challenge it.
A related argument warns that the legislation threatens to politicize lender-of-last-resort decisions. Again, this is untrue. But even if it were true, how would that represent a departure from current practice? I hope we are not asking Americans to believe that the decisions to bail out various financial institutions over the past two years, and in particular to allow them to become depository institutions overnight that they might qualify for assistance, were made on the basis of a pure devotion to the common good and were not political at all. Most Americans, not unreasonably, seem convinced of another thesis: that Goldman Sachs, for instance, might be just a little bit more politically well connected than the rest of us…
If our monetary system were really as strong, robust, and beyond criticism as its cheerleaders claim, why does it need to rely so heavily on public ignorance? How can it be a sound banking system that depends on keeping the public in the dark about the condition of its financial institutions?
Let me also make clear that supporters of this legislation are strongly opposed to a watered-down version of the bill – which, incidentally, would only increase public suspicion that someone is hiding something.
If the Federal Reserve Transparency Act passes and the audit takes place, the American people will have achieved a great victory. If the legislation fails, more and more Americans will begin to wonder what the Fed could be so anxious to keep hidden, and the pressure for transparency will simply intensify. A recent poll finds 75 percent of Americans already in favor of auditing the Fed. The writing is on the wall.
The Federal Reserve may as well get used to the idea that the audit is coming. That would be a far more sensible approach than the counterproductive and condescending one it has adopted thus far, in which the peons who populate the country are urged to quit pestering their betters with all these impertinent questions. The Fed should take to heart the words of consolation the American people are given whenever a new government surveillance program is uncovered: if you’re not doing anything wrong, you have nothing to worry about.
The superstitious reverence that Americans have been taught to have for the Federal Reserve is unworthy of the dignity of a free people. The Fed enjoys a government-granted monopoly on the creation of legal-tender money. It is not an unreasonable imposition for Americans to demand to know about the activities of such an institution. It is common sense.
Why shouldn’t someone walk away from overbearing consumer, student or mortgage debt, so long as it is non-recourse? I can’t think of any reason to keep servicing debt if you have no hope of repaying the principal. What good is a high FICO score if you don’t want to run up another credit card balance or buy a home? Yes, landlords run credit checks, but it is getting harder and harder to fill vacancies, and this is what deposits are for anyway.
The “just walk away” attitude is gaining traction. It could snowball into next year as yet more mortgages reset and U-3 unemployment enters the double digits. What can the legal system do if tens of millions of people decide to stop paying their unsecured loans? This lady is right — there is safety in numbers and government inefficiency. You get a fresh start in five years anyway, which should be right around the time real estate has a chance of recovering.
This is exactly what needs to happen. The unpayable debt will by definition be defaulted on, so the sooner the better. The banks that issued it need to go under. Stories like this are refreshing, because we need to clear the air.