Payments on mortgages to be suspended across Italy after coronavirus outbreak
in.reuters.com
in.reuters.com
https://www.youtube.com/watch?v=2nBPN-MKefA
The first time I saw it I thought it was a luny conspiracy theory, but NO. It's all true.
This is not a surprise to anyone who understands how a modern monetary system works.
I guess this is why Bitcoin and its "there's a set amount of currency and we know exactly what it is" is so popular with people of a certain mindset; they expect that's how money works.
But because much of the money they got from somewhere can be requested at will (people can still remove money from their accounts), it is still liquid and still counts as money. So money is "created" this way.
That is how they create money. They don't literally just create whatever they need, only central banks can do that.
I don't doubt that the financial effect is what they say it is, but that does not look like what I would call creating money.
> In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans.
> Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks:
> • Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits. > • In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits
That value that backs up that money will be created by you.
Furthermore, Islamic banking has never relied upon fractional reserve banking.
So... no, not “factually incorrect”.
However, you are tendentiously representing heterodox economic theory as if it is mainstream; this is somewhat less than ideal, and impedes communication. And you go further, declaring that we abandoned fractional reserve finance in the 1930s. I am confident that even non-crank economists who subscribe to this theory will admit that the things that the original poster describes literally occur, to some reasonable level of approximation, and that the layout of money in a bank within US or European banking systems can therefore be meaningfully called "fractional reserve", even if endogenous-money theory is correct insofar as the underlying reserve multipliers are not a primary cause of changes in the total money supply (thus limiting the power of the central bank).
Given that we are much less interested in the total money supply and central bank policy, and much more interested in the basic mechanics of banking and where money is and is owed, the topic you raise is incredibly irrelevant at best, and a sign of gross overreach. Finally, the US and European banking systems cannot be said to run on the principles of Islamic finance and your mention of Islamic banking here is 100% totally irrelevant.
It is possible to advocate for this theory in discussions such as these. It may even improve understanding! This has not happened. Your posts do not promote understanding of economics or of banking, and you are not effectively advocating for this theory. I regretfully reiterate my conclusion that you are confused, and will note it is a further possibility that you are a crank.
Honestly, liquidity should not be a problem. The problem is effectively containing inflation.
Even when the bank holds the mortgages directly, the bank does not owe the mortgage income to deposit account holders. The bank may owe interest to those accountholders... but today, that is likely at or near 0% rates. If payments on the loan are suspended for N months, the people who lose out are the bank's shareholders.
In either case, this loss could be modeled as putting this month's interest payments at the end of the loan life, up to 30 years later, and discounting the amount received by the time value of money over that interval... or, alternatively, by moving all the interest payments back by N months over the lifetime of the loan and performing the discount that way; I think it works out to the same loss either way.
(To be clear, this is a real loss, in the same way that if I took $500,000 from your savings and retirement accounts, and bought myself a home, and lived in it rent-free for 5 years, and give you back the same $500,000, you have suffered a loss, and I have enjoyed a gain.)
It's notable that European bank shareholders haven't been doing well recently — for a variety of reasons. There may fundamentally be too many of them, with too many inefficient processes, being propped up by governments instead of failing in an orderly fashion and being consolidated. But that's a different policy discussion.
1. (most likely) The interest is still paid, but the outstanding notional payments are deferred. This causes no actual losses to banks, but may cause liquidity issues. VCentral bank can sort those easily.
2. (A bit less likely) Even interest rates are deferred, but they are capitalized to the loan so that your loan amount increases if you do not pay the interest. As above, no losses to the bank, but maybe liquidity issues.
3. (Least likely) Banks actually waive the payments. In this scenario it is primarily the shareholders that take the loss, but I would strongly expect that in this scenario government covers the losses of the bank.
All it does is suspend payments, not reduce the amount of payments.
So, once payment resumes, you still owe at least the same amount of debt.
[edit] As another poster mentioned, interest still accrues.
The city of Rome has decided to 500 euro per month for all self employed for next three months.
Avoid these offers like the plague.
I think directly comparing US and Italian banking is quite misleading, given the relatively large differences in typical consumer protections. Maybe it’s a bum deal, or maybe it’s actually going to be very helpful for the consumer.
You essentially want the economy on hold for 6 months, and then to come back at the end as if nothing happened.
...---if you can.
In Italy everything is shut down, but basic industries that are need to feed and care for the people. So, no paychecks and no friend or family can loan you money for mortgages
We can argue good investment should be rewarding but someone has to do the work. We cant all be investors. (at least not at this technological state, watch this space :P)
First of all, many people simply do not have the liquid assets (or any assets) to pay their mortgage while not receiving income. Many Italians who are not able to earn money during this period simply would not have been paying their mortgage regardless of a repayment suspension. So banks may as well get out in front of that rather than waste time sending hundreds of thousands of notices to people who are not able to pay. This is not a choice. Obviously if you can continue to pay your mortgage you should do so.
Second, there is a big difference between temporarily suspending repayment for 2? 3? months and what happened after Katrina where many people had stopped paying for many months or years. There is no way that a few months repayment holiday, even if interest does accrue during that period is going to push many mortgages into negative equity.
Third, Italian mortgages are absolutely capped at 80% LTV and many banks are more comfortable at 60% or even less. This is unheard of by American or UK standards but a consequence is that it would take years of repayment suspension and interest accrual to push into negative equity.
Fourth, negative equity is only relevant if you want to sell. Italians tend not to be super mobile anyway, so even if some people do spend some time in negative equity, only a subset of those people will be "stuck" and prevented from making a move they would otherwise make.
If you need a 100% mortgage now, all the big banks will tell you either to go away or talk to a specialist. The specialist will explain that there's basically no legal way to sell you a product on which obviously if anything goes wrong you default and lose everything but if you can find a guarantor that'll eat the risk that's an option. The guarantor puts up capital (maybe your parents offer the home they've paid off) and if the mortgage fails that capital will pay for it. So you essentially don't have a 100% mortgage, you've got an 80% (or better) mortgage against two properties, but if things do go badly wrong you aren't going to ever talk to your parents again.
75% mortgages are pretty common here. 80% is definitely more common than 60% but things are much better than they were when idiots thought prices could only go up.
I can think of 3 people off the top of my head who have a 95% mortgage.
It's far more common than you think, especially in areas in the North where you can get a decent property for less than £200k (95% loans are capped at £400k)
Oh yes the taxpayer
(They may have made a little money off the operation on net, yes, but that little accounting profit is a lot less impressive when you consider the risk of loss to which the German taxpayer was exposed.)
Sounds just like taking out a second mortgage - you increase your principle and get money (or avoid paying money) in the short-term.
That's a perfectly normal thing to want; I wish I could do it right now.
Europe is not the wild west.
Besides that consumer protection laws in Europe are much stronger anyway.
Not that it's important right now, but it seems like an interesting side-effect.
Edit: according to https://www.bloomberg.com/news/articles/2020-03-10/italy-neg... the government negotiated this with the banks, and TFA says that not all banks took the deal. So whatever it was, it probably softened the blow a lot.
This is a form of control which accepts the inevitable and ensures that there is no messy mass default process.
Op asked a very relevant question.
Note that Italy has strong renter's protections. If you tried to evict based on non-payment during the quarantine, you'd fail legally and the consequences to your reputation would be severe.
In politics perfect is often the enemy of good.
[0] https://fee.org/articles/the-slow-motion-financial-suicide-o...
The Roman Empire's collapse had dozens of interacting causes, from slavery and expansionism-collapse to leadership failures that make any corrupt politician today seem laughable.
To boil it all down to "Welfare" seems, disingenuous at best, and hopelessly partisan at the midpoint.
That said, yes, many societies have tried to make up for their systemic unfairness with debt forgiveness. Unless you fix the underlying causes however, the debt comes back.
History should be left to historians, not to libertarian think tanks cherry-picking examples to support their 21st century agenda. That is pretty much the only way to prevent people writing ''Rome fell in 476''.