[twoodfin]

Imagine you're a bank calculating the interest rate to offer on a loan. Do you think that rate will be lower or higher if you believe there are circumstances wherein the government would unilaterally allow your borrower to cease payment?

Obviously, if the government could be metaphysically certain of the loans that would never return another penny and only cancel those, there's no net loss to the bank. But there's no net gain to the borrower other than a potential psychological effect.

Risk of government-sanctioned default is the same as any other default risk, and will be priced into interest rates, hurting especially those with marginal credit whom the banks judge most likely to be the "beneficiaries" of some future forgiveness.

[amalag]

This is why in days of yore there was something called collateral. Loan goes bad, you take the collateral, maybe take a loss and move on.

Now banks think they can get rid of that concept too. They want loans to be insured by governments so there will never be defaults and they can simply mint money?

[ArkyBeagle]

But in the US, having collateral was viewed as a sort of privilege mechanism. Mitt Romney's Dad George, in the very best of intentions, tried to make it to where "underserved" or "redlined" mortgage districts got more service in mortgages to counterbalance things.

The end result of the monster that became blew up in 2008, after people took it far, far, far too far.

The hard problems are hard, mainly because you can't see the effect of an action until it's far too late.

Calomiris/Haber wrote a book explaining this. Recommended.

We can resort to a sort of grumpy, Congregationalist/Calvinist mentality but then stuff goes undone and people are poorer. Value should come from value, not suffering.

[forgetsusername]

>Loan goes bad, you take the collateral

Yeah, and in the most recent cases that was somebody's home, for which nabbing that collateral was controversial.

>Now banks think they can get rid of that concept too.

Banks are pretty good at assessing loan risk. You don't think so? Go try to get a small business or unsecured loan.

[phkahler]

>> Risk of government-sanctioned default is the same as any other default risk, and will be priced into interest rates, hurting especially those with marginal credit whom the banks judge most likely to be the "beneficiaries" of some future forgiveness.

This seems to be the opposite with student loans. The government has backed those and will not allow them to be dismissed in bankruptcy and all that, yet those loans have some of the highest interest rates around.

Is that just based on the lack of collateral? I mean a person could die and then it will never be repaid. Homes are required to carry insurance, so the risk of destruction is covered. Is that what it is, or are they just screwing people over? These are just questions, I have no skin in the game ATM and hope my kids can avoid it as well.

[aback]

Also:

Imagine you're a bank calculating the interest rate to offer on a loan. Do you think that rate will be lower or higher if you believe there are circumstances wherein the government would unilaterally forgive your bad debts if your customer defaults?

[sbierwagen]

  Imagine you're a bank calculating the interest rate to 
  offer on a loan. Do you think that rate will be lower or 
  higher if you believe there are circumstances wherein the 
  government would unilaterally allow your borrower to cease 
  payment?

It is unquestionably true that a debt jubilee would result in higher interest rates. It is somewhat disingenuous to spin this as a negative for people with marginal credit: you only have bad credit if you are very young, or have outstanding debt-- annulling a thousand bucks of debt has dramatically greater marginal utility than the ability to get a loan of a thousand dollars at 15% APR instead of 25% APR.

I also question how long the effect of a jubilee-premium would last. Five years? Ten? Brazil, Argentina and Mexico all defaulted on their sovereign debt in the 80s-- (https://en.wikipedia.org/wiki/Latin_American_debt_crisis ) and they certainly weren't locked out of the bond market forever-- Mexico's 30 year bonds are standing at about 6.8% right now. Gold was illegal to own in the United States from 1933 to 1975, (https://en.wikipedia.org/wiki/Gold_Reserve_Act ) yet investors aren't acting like they're afraid of the government taking their gold again-- it's at $1,155 a troy ounce right now.

[forgetsusername]

>weren't locked out of the bond market forever-- Mexico's 30 year bonds are standing at about 6.8% right now

6.8% represents quite a bit of risk in this environment of historically low rates. How is Argentina doing?

I mean, I agree that people will eventually "forget", but that's always with the assumption that the "last time" was some unique set of circumstances.

It's amazing to me that people still believe that the best way to reap the benefits of capitalism is to seize or extort the capital from the capital owners. Of course, everyone thinks that those capital owners are some mysterious "other", and they'll be unscathed by the wealth grab. I wonder what people would think if they were told by the government that their savings and investments were being reset to zero so some students could get a free education? Probably wouldn't be so impressed...

[sageikosa]

Not to mention the precedent it sets with the corresponding expectations of future similar actions should they be needed, and the erosion of confidence in your money's ability to maintain inflationary value.