Interesting article in MarketWatch by Brett Arends:
There’s a way to do it. Fast. And relatively simple.
But you’re not going to like it. You’re not going to like it at all.
Default. A national Chapter 11 bankruptcy.
The fastest way to fix this mess is to see tens of millions of homeowners default on their mortgages and other debts, and millions more file for bankruptcy.
We’re hocked up to the eyeballs, and then some. We’re at the bottom of a lake of debt, lashed to an anchor. American households today owe $13.3 trillion. That has quadrupled in a generation. It has doubled just in the last 11 years. We owe more than any other nation, ever. And for all the yakking about how people are “repairing their balance sheets,” they’re not. From the peak, four years ago, they’ve cut their debts by a grand total of 4%.
If a company defaults, the stockholders get wiped out. If a homeowner defaults, the bank takes the home. I like keeping my home, as well as my savings, and my credit rating. Most people are the same.
Some will say the financial impact would be terrible. But the banks would just be facing up to reality. And a lot of these mortgages are already trading at distressed levels.
Some will say, “why should people get away with borrowing imprudently?” The response: Why should the banks get away with lending imprudently?
We have tens of millions who cannot repay their debts. But they are all trying to. That sucks huge amounts of money out of the economy. And that means these people cannot function properly as consumers or workers. That’s the reason people aren’t coming into your restaurant. It’s the reason people aren’t taking your yoga class. It’s the reason they haven’t hired you to redo the kitchen.
And so tens or hundreds of millions of perfectly responsible business owners and employees are also suffering from this slump. That’s the reason we have a shortage of demand. That’s the reason no one is hiring.
Even worse: People who are underwater on their mortgage, but who do not want to default, cannot move to where the jobs are either. They are stuck with their home.
You want to break this logjam? Try Chapter 11 for the nation. Massive defaults. Clear the decks, clean the books.
What are the alternatives?
I brought up similar points last week with my 5 Ways Obama Can Fix Housing, advocating mortgage bankruptcy cram-downs and ending the blacklisting period for short-sellers and walk-aways.