Stephan Roach: Debt Jubilee Needed

From Edward Harrison, via nc links:

On CNBC today, Stephen Roach of Morgan Stanley says, we need “ways to forgive the excesses of mortgage, installment and revolving credit, as what was done in the 1930s, that will help consumers get through the pain of deleveraging sooner rather than later.” There are four ways to reduce real debt burdens:

1. by paying down debts via accumulated savings.
2. by inflating away the value of money.
3. by reneging in part or full on the promise to repay by defaulting
4. by reneging in part on the promise to repay through debt forgiveness

Listening to Roach explain the conundrum of high unemployment and poor wage gains, juxtaposed with high debt, it is clear he recognizes there is zero chance that consumers will be able to support the kind of economic growth via deleveraging and accumulating savings that avoids a deflationary outcome. The macro backdrop for consumers is deflationary.

Consumer deleveraging, along with government budget cuts equals major pain.  There may well have to be major debt forgiveness of consumers to get out of this mess.  That could be voluntary on the part of creditors, or debts may be removed through default, forclosure and bankruptcy.  First on the list should be the home equity loans which will never get paid back.  That might wipe out the four major TBTF banks, but so be it.