Socialization of Private Debt

Iceland's economic situation is pretty grim. In the news now is the Icesave affair. I am not very familiar with it, but it seems Icesave was a private bank in Iceland with international depositors, including some in Britain and the Netherlands. When the bank failed, those countries reimbursed the depositors. Now they expect to collect the money back from Iceland. As I read the NYTimes article, I was scratching my head wondering why Britain and the Netherlands think they have they right to such a claim.

Birgitta Jonsdottir, a member of Parliament from the fledgling people-power Civic Movement Party, said that a “no” vote would send a strong message to the world.

First, she said, “We don’t believe in the socialization of private debt.” Second: “It is time for Britain to treat us like a sovereign nation and not a colony.” And third: “They can’t use the I.M.F. to blackmail us into doing what they want on Icesave.” But it seems they can.

Right on Civic Movement Party! If my neighbor's business fails, am I responsible for his debts? The whole premise is bizarre. Private is private. I think this issue reflects badly on the IMF, giving me the impression that they have too much power and are willing to abuse it.

As with our government's recent bailouts of companies "too big to fail", there is the potential for serious moral hazard here.

Good for the people of Iceland for telling Britain, the Netherlands and the IMF to go spit.

Ann says: Unfortunately, in the US, that ship has already sailed. I do not begin to understand why people who invested in real estate, and who lost their shirts, should be preferred over people who invested in stocks and lost their shirts. I don't care in the slightest that a neighbor is "underwater" on their real estate investment, since my investments are similarly "underwater". Funny how when stock prices drop, we don't get bailed out and our losses are not (thankfully) socialized. The same should be true for real estate.

If you choose to invest in real estate, and the value of your property declines, you should not be able to walk away from the debt or the mortgage. That is a large part of the problem. In Australia, when you take out a home loan, you are responsible for repaying that loan. Shocking idea, isn't it. As a result, Australia's banks are just fine and they've weathered the international crisis quite nicely. People there are careful when taking out loans, because they know that they are responsible for repaying them. In the US people can be cavalier when taking out mortgages, because they know the government or the banks will get stuck with them if they stop paying.