Tuesday 6 December 2016

Economy needs debt forgiveness

Matthew Elderfield agrees it's about time we got real about moral hazard, writes Brendan O'Connor

Published 29/05/2011 | 05:00

Financial Regulator Matthew Elderfield
Financial Regulator Matthew Elderfield

YOU may have missed a small report during the week that was, in fact, a hugely significant story. It concerned Matthew Elderfield, the Financial Regulator, the man who came in to clean up Dodge and save us from our wicked, wicked ways.

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SHERIFF Elderfield, as you will know, has always been very dismissive about any notion of debt forgiveness for the enormous number of people in this country who are crippled by negative equity. As well as the fact that we apparently can't afford debt forgiveness, Elderfield cited the moral hazard argument as one of his main objections to getting real about the kind of crippling debt that has made vast swathes of the population into essentially non-performing actors in the economic life of the country.

Moral hazard is of course the misguided notion that while it is OK for everyone in the corporate sphere to have bad debts dealt with realistically, so the world can move on and people can get back to doing business, it doesn't work that way for individuals. Apparently if you introduced any level of debt forgiveness for ordinary people, they would run straight out and get into more mountains of unsustainable debt. In fact, according to the theory of moral hazard, if we helped people get out of unsustainable debt, we would actually be encouraging them to do the same thing again. It is unclear just who is going to give people who didn't pay off their lunatic debt once more lunatic debt. Neither is it clear why anyone who has been burned by debt, and who has had to go through the torture of having to extract themselves from it, would run out and do the same thing again. But while that might sound all very well in practice, it'll never work in theory apparently.

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