Our Very Own Greek Tragedy

03/05/2012 6:00 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Greece may dominate the headlines, but we have a big debt problem in the US that could hurt our economy just as badly in the long run, writes MoneyShow.com personal finance expert Terry Savage.

What do we do about the debt? That is the biggest question in the world today, whether we’re talking about mortgage debt here in the United States, the US national debt—now over $15 trillion—or European debt, particularly the Greek debt that obviously cannot be repaid.

What do we do?

A Greek Tragedy
Let’s start farthest away from home, where it is easier to see things from a dispassionate point of view.

Greek debt has been making headlines for months. Not only their need to borrow more to pay their current bills, but their need to refinance an estimated €400 billion of existing debt as it comes due.

The banks that hold the debt—and the European Central Bank—are demanding tough measures before giving Greece more money. But remember, the banks are on the hook for all that money. If they must write off the loans in a default, they too might be in a dire financial situation.

In effect, there is a standoff. The borrowers can’t afford to repay, and the lenders can’t afford to foreclose.

Shakespeare wisely said: “Neither a borrower nor a lender be.” Could Shakespeare possibly have anticipated the current situation, with both sides caught in the trap of bad debt?

Until now, Europe’s solution has been to demand that Greece put into effect ever-tougher austerity programs, in an attempt to slow government spending and raise taxes so at least some of the money can be repaid. As a result, Greece is in a depression, being asked to accept even more pay cuts, higher taxes, and energy bills, and a default on promised pensions.

What Greek citizen would vote again for the government that accepted this deal? Thus, there is chaos in government and on the streets of Greece, as the citizenry rebels against paying back the debts their banks and government incurred while they enjoyed life.

And if Greece does default, and drop out of the European Union, who would ever lend them money again—and at what rates? And how could Greece recover if it had to pay higher rates?

An American Tragedy
A very similar scenario is unfolding here at home, with our mortgage debt. It’s a problem that remains unresolved, and it threatens America’s future much as the future of Greece is threatened by its debt.

What should we do about the mortgage debt?

The answers depend on which side of the deal you’re on—the borrower, or the lender. And even if you’re not part of the transaction, your point of view will depend on your own experiences in life. For example, if you’re a homeowner who has struggled, but managed to keep current on your mortgage payments, you might have an entirely different perspective on loan forgiveness than a family that is scheduled to be foreclosed.

A new report shows that housing prices in 20 major cities are still at the lowest levels since the crisis started. There are calls for the government to “do something” about loan forgiveness. It’s a cry that politicians certainly understand.

In fact, we might trace the start of the current housing-debt mess right back to Congress, which as part of a social agenda encouraged the banks to make loans in communities they might otherwise have avoided. How did that positive policy initiative, extending home ownership and the American dream, go wrong?

Was it the push from Congress to have Fannie and Freddie guarantee loans (with taxpayer dollars) to even more borrowers (voters) who were even less creditworthy? Or was it the profit motive on the part of lenders who could charge higher fees and rates on these loans? Or the blind greed of homebuyers who walked into the trap?

There is plenty of blame to go around. The question now before us is what to do about it.

The acting head of the Federal Housing Finance Agency (FHFA), which is supervising mortgage giants Fannie Mae and Freddie Mac (now in conservatorship and supported by taxpayer dollars), has been asked by politicians to create a program of loan forgiveness.

Some see it as a better alternative to ending the housing collapse than the current unworkable plan for refinancing underwater homeowners at lower rates, and deferring principal payments.

But to actually “write off” the loans, to forgive them, would threaten the very solvency of Fannie and Freddie —the owners or guarantors of more than 60% of outstanding mortgages! And would that really help the housing market—or just force mortgage rates higher as lenders that that risk into account?

Now do you see comparison? Just as the Europeans want to stretch out the process of dealing with the Greek loans to avoid having to acknowledge a default, our Federal housing authority wants to avoid actually declaring a default on the part of millions of homeowners who are unable to pay their mortgages.

Just as lenders to Greece keep coming up with creative solutions to delay the day of reckoning, there is pressure in America to “do something” creative to avoid recognizing the mortgage disaster for what it is: money lost, and dreams lost.

 And until everyone can agree that “the emperor has no clothes” and the debt can’t be repaid, we’re just fooling ourselves in a very expensive way. That’s The Savage Truth.

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