The Transatlantic Growth Gap

[LeveragedBuyout]

My comments:
1) Despite their flaws, US regulators remain some of the best in the world. Their discipline in forcing banks to write off non-performing loans and raise new capital has clearly had the desired effect.
2) The bankruptcy escape route taken by so many Americans to avoid responsibility for their own actions increases moral hazard, and has been (and will continue to) increase the cost of mortgages for everyone else.
3) After changes made in 2005, the bankruptcy code in the United States is much harsher than the author portrays. See Bankruptcy Abuse Prevention and Consumer Protection Act - Wikipedia, the free encyclopedia
4) We remain addicted to debt, which bodes ill for sustainable growth in the US. The only stable source of GDP growth is productivity growth, not leverage (credit).

The Transatlantic Growth Gap by Daniel Gros - Project Syndicate


WORLD AFFAIRS

DANIEL GROS
Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.

JUL 21, 2014
The Transatlantic Growth Gap
BRUSSELS – The global financial crisis that erupted in full force in 2008 affected Europe and the United States in a very similar way – at least at the start. On both sides of the Atlantic, economic performance tanked in 2009 and started to recover in 2010.

But, as the financial crisis mutated into the euro crisis, an economic gulf opened between the US and the eurozone. Over the last three years (2011-2013), the US economy grew by about six percentage points more. Even taking into account the increasing demographic differential, which now amounts to about half a percentage point per year, the US economy has grown by about 4.5 percentage points more over these three years on a per capita basis.

The main reason for the gap is the difference in private consumption, which grew in the US, but fell in the eurozone, especially in its periphery. A retrenchment of public consumption actually subtracted more demand in the US (0.8 percentage points) than in the European Union (0.1 points). This might appear to be somewhat surprising in light of all of the talk about Brussels imposed austerity.

In fact, public consumption in the eurozone has de facto remained fairly constant over the last three years, whereas it has declined substantially in the US. (The same is true of public investment, though this constitutes such a small proportion of GDP that transatlantic differences could not have had a large impact on growth over a three-year horizon.)

The contraction of private investment in Europe accounts for only a small part (one-third) of the growth gap. Though the financial-market tensions that accompanied the euro crisis had a strong negative impact on investment in the eurozone periphery, investment demand has also remained weak in the US, minimizing the overall difference.

The resilience of private consumption in the US, the key to the growth gap, is not surprising, given that American households have reduced their debt burden considerably from the peak of more than 90% of GDP reached just before the crisis. The lower debt burden is also a key reason why consumption is expected to continue to grow much faster in the US than in the eurozone this year and next.

But the crucial question – and one that is rarely asked – is how US households were able to reduce their debt burden during a period of high unemployment and almost no wage gains while sustaining consumption growth. The answer lies in a combination of “no recourse” mortgages and fast bankruptcy procedures.

Millions of American homes that were purchased with subprime mortgages have been foreclosed in recent years, forcing their owners, unable to service their debt, to leave. But, as a result of no-recourse mortgages in many US states, the entire mortgage debt was then extinguished, even if the value of the home was too low to cover the balance still due.

Moreover, even in those states where there is full recourse, so that the homeowner remains liable for the full amount of the mortgage loan (that is, the difference between the balance due and the value recovered by selling the home), America’s procedures for personal bankruptcy offer a relatively quick solution. Millions of Americans have filed for personal bankruptcy since 2008 , thereby extinguishing their personal debt. The same applies to hundreds of thousands of small businesses.

Of course, there has also been a surge of bankruptcies in the eurozone’s periphery. But in countries like Italy, Spain, and Greece, the length of a bankruptcy proceeding is measured in years, not months or weeks, as in the US. Moreover, in most of continental Europe a person can be discharged of his or her debt only after a lengthy period, often 5-7 years, during which almost all income must be devoted to debt service.

In the US, by contrast, the corresponding period lasts less than one year in most cases. Moreover, the terms of discharge tend to be much stricter in Europe. An extreme case is Spain, where mortgage debt is never extinguished, not even after a personal bankruptcy.

This key difference between the US and (continental) Europe explains the resilience of the US economy to the collapse of its credit boom. The excessive debt accumulated by households has been worked off much more rapidly; and, once losses have been recognized, people can start again.

The cause of the transatlantic growth gap thus should not be sought in excessive eurozone austerity or the excessive prudence of the European Central Bank. There are structural reasons for the eurozone economy’s slow recovery from the financial meltdown in its periphery. Most important, compared to the US, the excess debt created during the boom years has been much more difficult to work off.

European officials are right to promote structural reforms of EU countries’ labor and product markets. But they should also focus on overhauling and accelerating bankruptcy procedures, so that losses can be recognized more quickly and over-indebted households can start afresh, rather than being shackled for years.

Daniel Gros
attributes America's edge over Europe to its faster bankruptcy procedures.

- Project Syndicate


Read more at Daniel Gros
attributes America's edge over Europe to its faster bankruptcy procedures.

- Project Syndicate

 

[LeveragedBuyout]

And look at that, here's the logical follow-up, showing that nothing is free in this world:

Why you may be paying for someone else’s mortgage relief - The Washington Post

Why you may be paying for someone else’s mortgage relief

• 0
  
• More

By Dina ElBoghdady July 22 at 12:42 PM

They'll rent it back to you. (Rick Wilking / Reuters)
In recent years, banks have agreed to spend billions of dollars to help struggling homeowners as part of settlements with the government related to the lenders' alleged misconduct during the housing crisis.

If all works as planned, the relief should end up helping many people who are struggling to keep up with their mortgage payments. But it may not work out as well for investors who purchased the mortgages that these homeowners took out.

Who are the investors? They include unions, pension funds, 401K savings plans and mutual fund shareholders, not just Wall Street firms, according to the Association of Mortgage Investors. In other words, they're the general public, as AMI likes to put it.

And recent multibillion-dollar government settlements with JPMorgan Chase, Citigroup and others hurts those investors, the group says.

The settlements call on the banks to grant various forms of relief, such as modifying the mortgages of "underwater" borrowers by reducing the size of their loans. (These are borrowers who owe more on their mortgages than their homes are worth.) When that type of debt forgiveness takes place, whoever owns the loan takes a hit because they don’t get paid as much as was promised. In some cases, the banks own the loans. But in others, the banks have bundled the loans into securities and sold them to investors, which means the investors (and the firms that manage their money) get burned when a loan is modified. That’s why AMI is calling foul.

“If they want to settle and help consumers who need help, terrific,” said Vincent Fiorillo, president of AMI's board and global sales director at Doubleline Capital. “If you want to take the investors’ money to settle, that’s where I have a problem. The investors are not the bad actors here.”

In its record $13 billion settlement with the government last year, JPMorgan agreed to grant $4 billion in consumer relief. On Tuesday, the monitor who tracks the distribution of that relief money reviewed a small sample of the bank's loans (100 of them) to make sure the bank is correctly recording the aid, and it is. But the review also shows that 44 percent of those loans are owned by investors, not the bank.


More than two years ago, when the government and 49 U.S. attorneys general negotiated a $25 billion settlement with some of the nation’s largest banks, investors paid almost a quarter of the $20 billion that was set aside for relief, said Laurie Goodman, director of the Urban Institute’s Housing Finance Policy Center.

The deal was set up to encourage banks to modify their own loans. For instance, every dollar of debt that the bank forgave on its own loans would be applied to the $20 billion total. But for every dollar of debt forgiven on an investor-owned loan, the bank was credited only about 50 cents. Even so, investor-owned loans made up 39 percent of relief credited to Bank of America and 29 percent of relief credited to JPMorgan under that deal, Goodman said.

When the government and state authorities last year ordered Ocwen Financial to provide $2 billion of relief for underwater borrowers, investors carried the vast majority of that cost burden, Goodman said. Ocwen only services loans, meaning it collects borrowers’ payments. It does not own loans.

“The investors have a huge point,” Goodman said. “The banks are basically spending their money.”

In some of these deals, like the $7 billion Citigroup settlement last week, banks are not allowed to forgive mortgage debt on investor-owned loans without the investors' permission. But investors say that the trustees charged with granting permission work for the banks, not the investors, underscoring an inherent conflict of interest regarding the trustees’ role.

The Justice Department, which negotiated many of these settlements, did not return calls seeking comment. It also has not responded to two letters AMI sent to U.S. Attorney General Eric Holder, including one sent last month, said Chris Katopis, the group's executive director.

"We ask that we be included in any negotiations from this point forward to make sure our economic interests are protected and not sacrificed by the parties the government has charged," Katopis wrote in the most recent letter.

David H. Stevens, head of the Mortgage Bankers Association, said that investing comes with risks, and just about anyone with a financial stake in the housing sector got hit with unprecedented risks once the housing market tanked and the government rushed to its rescue. No one escaped unscathed, he said.

“Investors can be screaming from the corners that they’ve been harmed, but it’s tough to say the government can touch everybody else’s mortgages but not mine,” Stevens said.

On the other hand, the government is playing an outsize role in supporting the mortgage market right now. Policy makers are struggling to scale back the government’s footprint and lure the private sector back. And these types of settlements are likely to discourage their return, he said.

“If you’ve broken the trust, how do you get them back?” Stevens said.

 

[senheiser]

basesicly America is printing money while europe cant as much, there is no rocket science behind it

 

[As is - where is]

Of course, there has also been a surge of bankruptcies in the eurozone’s periphery. But in countries like Italy, Spain, and Greece, the length of a bankruptcy proceeding is measured in years, not months or weeks, as in the US. Moreover, in most of continental Europe a person can be discharged of his or her debt only after a lengthy period, often 5-7 years, during which almost all income must be devoted to debt service.

We're actually thinking right now and discussing with the troika about the issue of these non-performing loans. The money that remains after a person with a non-performing loan has covered his basic needs will be measured and then based on this the time that the loan has to be paid back will be extended and in some cases previous interest rate payments will receive a haircut.

 

[LeveragedBuyout]

We're actually thinking right now and discussing with the troika about the issue of these non-performing loans. The money that remains after a person with a non-performing loan has covered his basic needs will be measured and then based on this the time that the loan has to be paid back will be extended and in some cases previous interest rate payments will receive a haircut.

A good step forward. There is no choice but to face up to the reality that these non-performing loans will never be paid back in full, so the banks might as well reach whatever accommodation they can.