Debt that can’t be repaid, won’t be.
Since the 1970s, every economic recovery has been weaker than the one before. Michael Hudson, in his new book, Killing the Host, said the reason is that, with each recovery, there has been a greater overhang of debt, which drains resources from the real economy of tangible goods and useful services.
The current economic recovery has been a recovery of the financial markets, not a recovery of jobs and wages of ordinary people. United States and European Union economic priority has been to protect bond-holders and creditors from loss.
Hudson argued that this is unsustainable. Either there will be a planned write-off or write-down of global debt, or there will be a financial collapse, like the one that began the Great Depression of the 1930s. Either way, the debt will be wiped out.
His preference is for what he called a Clean Slate, as was done in West Germany in 1947 as part of a currency reform. Basically, most German debts were canceled, except for employer wage contracts and bank accounts below a certain maximum amount (since wiping out bank debt means wiping out bank savings).
This, together with tax reform, the lifting of wage and price controls and the 1953 forgiveness and restructuring of German public debt, made possible the German economic miracle.
As Hudson admitted, this is pretty strong stuff and unlikely to be accepted. An alternative is the enforcement of an old New York law, going back to Revolutionary times, against fraudulent conveyance. This means that a debt is void if the lender knew in advance that it couldn’t be paid back.
If Snidely Whiplash lends money to Mrs. Innocent Goodbody, a poor widow living on Social Security, with her $250,000 house as collateral, with the expectation she won’t be able to keep up the payments and he’ll be able to foreclose on the house—that’s an example of “fraudulent conveyance.”
This applies to the subprime mortgages and “liar’s loans” prior to the 2008 financial crash. Another concept, “accounting fraud,” applies to the bad loans that were given high debt ratings, securitized and sold to the unwary. Canceling debt originating in fraudulent conveyance and accounting fraud would have a huge impact.
Hudson said that home mortgages could be scaled back to what is necessary to amortize a property based on its assessed value. Or mortgages could be scaled back to 25 percent of the borrower’s income, which is what conservative lending practices require in the first place.
Congress in fact authorized a program to do just that as part of the 2008 bank bailout. But Timothy Geithner, Obama’s Treasury Secretary, declined to implement it.
All this disrupt the financial markets and the economy generally, but Hudson wrote that it would clear the way for a good economic expansion, based on investment in the real economy, as happened in Germany.
Anyhow, he wrote, the alternative is more foreclosures, more economic hardship, more government bailouts until it becomes absolutely clear that that the debts are unpayable. In the end, debt that can’t be paid, won’t be.