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A Lesson from Greece: Time for an American Bail-In A Lesson from Greece: Time for an American Bail-In

A Lesson from Greece: Time for an American Bail-In

by Tim Fernholz

November 13, 2011

As attempts to rescue Europe from a debt-driven financial crisis take shape, two linked strategies are being employed: The hated bailout and its less well-known but equally important (and far nicer) cousin, the bail-in. We need a bail-in in America.

When you hear people talking about bailing out Greece, that means a lot of other European countries—as well as global institutions like the IMF and the Chinese, if anyone can convince them to play—want to give the Greek government money so that the country can pay off everyone it owes money—primarily banks in France, Germany and the United Kingdom.

Whether or not the Greeks are bailed out, the country is in for an ugly near- and medium-term future that involves cutting their spending quite a bit: They’re not going to be able to borrow money from other countries for a long time, either because they’ve defaulted or as part of the conditions imposed by the people providing the bailout.

But because the international community would like to sweeten the deal—they’d rather see Greece accept their bailout than default and create more market chaos—and because Greece simply can’t pay the debts it has, they’ve worked a bail-in into the equation. Greek debts will be cut 50 percent, forcing their lenders to share some of the losses—after all, they have some responsibility for the risk of their investments.

In the United States over the last two years, we’ve faced a different kind of financial crisis, but one that is relatively analogous: In order to keep our financial system from cratering under the weight of all the bad mortgage loans it created, the U.S. government bailed the banks out in 2008 with the TARP program and through Federal Reserve lending. It made the government a lot of money, saved the financial system, helped avert a depression, and kept the bankers highly profitable and highly paid.

What it didn’t do is solve our unemployment problem or our economic growth problem. One of the main reasons it didn’t do that is because there was no concerted effort to help alleviate Americans’ massive mortgage loan debt burden; thanks to the drop in housing value, more than 1 in 4 homeowners owes more money than their home is worth.

When people have a lot of debt, they don’t spend money, so businesses don’t earn money and hire people. That’s one of the reasons it’s so hard to bounce back from financial crises like these. The answer, then, is to engage the other half of the equation and give Americans a bail-in.

The best way to do that is probably through mortgage principal reductions, where banks write-down people's mortgages to manageable levels in lieu of foreclosure, or allow people who are behind on their payments to cede ownership and pay market rent to stay in their homes. The government would likely have to help coordinate this move, but it only makes sense: Public monies kept the banks alive when they were in trouble, and it’s time for the banks to do the same for the economy. It doesn’t necessarily need to be mortgage loans, though: Some people suggest increasingly onerous student loans should be the target of a bail-in.

However we do it, cutting debt will free people to spend money, helping stimulate the economy. It’s only fair, and if it’s good enough for the Greeks, it’s good enough for us. 

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