Debt relief without moral hazard.

I put on my thinking caps last week and drafted a paper called ‘Designing a Debt Relief programme with minimal moral hazard to address the Irish household debt overhang‘.

We were every happy with the write up it got in the Sunday Independent via Carol Hunt.

There is far too much talk of ‘moral hazard’ in the public debate to date, instead we should be also considering ‘separating equilibrium’ (which is kind of the opposite of moral hazard – it’s the ‘pain’ that comes with moral hazard ‘gain’).

To do this you have to create a programme which works within some of the parameters of the existing laws (new legislation must still take account of what exists before it), look at the operational aspects of the scheme (how it functions in real life), design a general algorithm of the process and most importantly have an ‘incentive alignment’ which means that neither party voluntarily makes an action to the intentional detriment of …

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How to approach your bank about a mortgage problem

There are plenty of people having money related problems of late, often it is not the ‘rate’ but the ‘weight’ of the general debt that is getting them. Simply put, they have borrowed too much, sometimes its on credit cards, other times it’s a single huge mortgage or many of them. What matters is that the situation is untenable and they need to talk to a lender.

What I can say is that having a plan in place before going and speaking to the bank is a great idea, if you go along and let them control the game you will only get offered the solutions they see as being fit for you. On the other hand, if you go with a well made out plan and several options you are likely to have a higher success rate, this isn’t just my opinion, it is also something that has been said to me by several senior credit controllers across a few banks.

So have a good file with all of the necessary information, make sure that you have a plan …

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Debt/GDP or Debt/GNP are either of them a good metric?

We hear about Debt/GDP all the time (national debt/Gross Domestic Product; total output of the economy) and the standard argument is that we should be looking at Debt/GNP (national debt/Gross National Product; GNP strips out non-Irish domiciled output – what remains here).

The question should perhaps not be ‘which is better Debt/GDP or Debt/GNP’ it should be is ‘Debt/G-anything’ the relevant metric? There are a few reason for why GNP and GDP are both lacking, in fact it distorts a true view of our Deficit

1.    It’s a thing of the past – both examples are historical by nature, they change and that is why any conversation on GDP and GNP is a constantly movable feast. Imagine if I asked you to drive across the country and describe the scenery to me, but you could only do so by telling me what you saw in the rear-view mirror? That is what GDP & GNP are about. Debt/GDP levels in Europe soared after …

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Debt Deflation

Irving Fisher was a leading economist in the early 20th century. After being caught out during the Great Depression (he famously quipped, “Stock prices have reached what looks like a permanently high plateau.” right before the bottom fell out), he did a lot of soul-searching and research to understand where he and his profession had gone wrong. By 1933, he had come up with a framework which very well describes what happened during the depression and happens in similar episodes of credit crisis.

From an issue of Econometrica in 1933: “Assuming, accordingly, that, at some point of time, a state of over-indebtedness exists, this will tend to lead to liquidation, through the alarm either of debtors or creditors or both”. Then we may deduce the following chain of consequences in nine links:

1. Debt liquidation leads to distress selling and to 2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes 3. A fall in the level …

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The Euro is a credible currency

Quantitative Easing (which used to be called deficit monetization) is justified – in this clip – by ECB president Jean Claude Trichet. Monetary policy works…. eventually, and when it does it tends to result in high levels of inflation.

Some people said the Euro wouldn’t last a decade, for our part, we hope that they are proven to be wrong, the will of society is a very powerful incentive and can be the difference between what should happen in theory and what actually occurs, for that reason I think the Euro will pull through but there will need to be some serious changes made in the way that the Eurozone manages itself.

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