Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Financial Planning > College Planning > Student Loan Debt

LTCI Watch: Zombie loans

Your article was successfully shared with the contacts you provided.

I rushed out of the office yesterday early enough to go eat dinner. With other people. With actual forks, knives and even spoons. We weren’t even playing with our phones. We were “talking.”

One topic of conversation (given that this dinner took place in New York) was negative interest rates.

See also: Forget the Great Recession — welcome to the ‘Great Repricing’

Central bankers in some countries are so sick of commercial banks playing it safe (by, say buying government bonds believed to be ultra-safe, or, by depositing money in the central bank itself) that they have set benchmark rates below zero.

Instead of earning a small, insulting bit of money to buy government bonds, big banks now have to pay what amounts to a small service fee for the privilege of protecting their assets within the warm, loving embrace of government bonds.

One big issue that came up is: If some world financial information technology systems had problems with the year changing from 1999 to 2000, what the heck is going to happen to financial IT systems when interest rates are at rates that the system designers never imagined to be possible?

What if, say Giant Bank’s, or Giant Insurance Company’s, computer decides that the gap between an interest rate of positive 6 and negative 2 is actually 4, not 8, because the computer automatically assumes a number that looks like a negative interest rate has a minus sign in front of it by mistake? What then?

But another problem is that the negative rates are terrible for long-term care insurance (LTCI) issuers, retirement savers, and others trying to earn a little money on reasonably secure investments to meet long-term obligations. Low rates rob long-term thinkers to help people who are drowning in the short-term, and negative rates do even more to favor the people trapped in short-term crisis over the people who’ve avoided crises, for the most part, by planning ahead.

LTCI issuers may have made some mistakes, but they would look a lot less mistaken if their average new-money portfolio yield was 8 percent.

See also: The real story behind LTC rate increases

And the real problem at the heart of the economy is clearly not high rates, but piles of “zombie debt” that’s not exactly in default, but that no one is ever going to be able to pay off through the normal course of business.

The government and lenders have tried to be soft-hearted by not foreclosing all of the homeowners who could be foreclosed on, and by not forcing all of the small business owners with giant 1985-vintage credit card debt due to creative financing efforts that went wrong into Chapter 7.

The result is that the people with the zombie debt keep the prices of all kinds of assets, from homes to art to businesses, too high for moderately broke but zombie-debt-free people to buy anything, and lenders’ debt-to-income limits keep the zombie debt holders from borrowing more or doing much of anything.

The zombie debt holders sit there, quietly, somehow scraping up enough to pay their minimum payments each month, but not able to do anything to improve their situations.

Low rates help people and companies that are already doing fine and can afford to pay the government a little money to keep their cash safe. The low rates might provide some relief for holders of adjustable rate zombie debt. But, for holders of fixed-rate zombie debt, the low rates do nothing helpful. The zombie debt holders can’t refinance their zombie debt or take out new low-rate loans, because no one will touch them.

The tough way to deal with the zombie debt may be simply to force the zombie debt holders into some kind of liquidation proceedings, then hope everything settles down.

A nicer way might be to find some way to identify zombie debt holders who are mainly victims of economic change, not for making wildly irresponsible decisions, and find some way to cancel or restructure their zombie debt, so that they can get out of their cells and back into the economic game.

See also:

Treasury yield forecasts slide as data disappoint economists

Economists are ditching their calls for a Fed rate hike in March

Have you followed us on Facebook?


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.