Is forgiveness the answer to the financial crisis for Greece?
Though justice be thy plea, consider this,
That, in the course of justice, none of us
Should see salvation: we do pray for mercy;
And that same prayer doth teach us all to render
The deeds of mercy.
~ William Shakespeare, The Merchant of Venice. Act IV, scene i
I recently listened to a lecture by Professor John Geanakopolos, James Tobin Professor of Economics at Yale who argued using Shakespeare’s ‘Merchant of Venice’ that the solution to both the US and European financial crisis was forgiveness.
He laid out the situation in the US, based on his detailed research, that there are a very large number of house owners with negative equity i.e. their loans are higher than the value of their properties. Many of these home owners had been encouraged by the banks to borrow large amounts on the basis of the rising property prices, put up very small deposits, as little as 2% of the property value, based on little evidence of their earnings, the so-called ‘lo doc’ loans or self-certification, as it is called in the UK, and often interest-only i.e. paying only the interest and not any of the capital back. The argument being that with property prices rising so quickly when the property was eventually sold there would be more than enough profit to pay back the original capital. Professor Geanakopolos reasonably argued that this was irresponsible lending on the part of the banks.
He then went on to make the case as to why it would be in the banks’ best interests to forgive 50% of the loans for those who were struggling to make mortgage payments. He demonstrated that when the repossession process is started (which can take up to two years to complete), the home owner ceases to make any attempt to pay back the loan, stops taking any care for the property and may even damage the property. As the neighbourhood deteriorates due to the unkempt properties the value of not only this property but others in the area declines further. He demonstrated that by the time the costs of the repossession and the sale of the property were totted up that the return that the banks got was 25% of the value of the loan. Given that, Professor Geanakopolos argued that the banks would actually be better off if they forgave the home owner 50% of the loan thus giving the home owner the chance for reduced mortgage payments and an ability to continue to live in their property and to contribute to the US economy. This is an argument that he has taken to both the Obama administration and the financial regulators in the US, but has not yet, not surprisingly, received full popular backing.
Clearly this raises the question of whether people, some of whom have unwisely over-stretched themselves, who could be regarded as having been over-greedy in aspiring to buy properties beyond their means and, possibly even been dishonest in their reporting of their income (for those taking out lo-doc or self-certification loans) should be rewarded for their avarice by having their loans written off, while other more honest and risk-averse people who work hard to pay their mortgages despite rising costs get no such forgiveness? The counter argument being that the banks and their agents are guilty of being irresponsible in lending to these people who clearly could not afford these properties if the property boom faltered and deserve to be punished for their behaviour.
Whilst there is clearly some merit in the argument for the write down by the banks for the US housing market, particularly since this is impacts millions of households, the argument became more tenuous when Professor Geanakopolos, an American of Greek descent, argued that the Germans should forgive the Greek debt in a similar way to resolve the Euro crisis, which is having an impact on the US economy and globally.
In Russia Putin understood this. He lowered taxes and increased the number and effectiveness of tax collectors. The result was an increase in tax revenues.
Unless the level of tax collected is raised and a higher proportion of Greeks share the burden of taxes to pay back the debts that have been racked up then forgiveness will only be seen as a reward for tax evasion. Forgiveness needs to come with strings attached – something that Shylock would certainly have agreed with.