The case for a global debt writedown

Debt that can’t be repaid, won’t be.
==Michael Hudson

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.

David Graeber on debt as a false religion

If debt through compound interest is an obligation with no upper limit, and if it is in law an obligation which transcends all other obligation, then the idea of debt is like a religion—the sacrifice of all other values to Mammon.  Or so it has long seemed to me.

People today world are still sold into slavery to pay their debts.  Nations are required by international organizations to sacrifice the welfare of their people in order to pay debts to international banks, even debts incurred by previous rulers to acquire the means to keep their people down.  Overhanging debt holds back our economy, yet a write-down of debt seems unthinkable.

David Graeber is an American who teaches anthropology at Goldsmiths, University of London; he also is an anarchist who was one of the originators of the Occupy Wall Street protest.   In his book, Debt: the First 5,000 Years, he attempted to explain the origins of the moral, religious and social meaning of debt.

Debt: the First 5,000 Years is profound, interesting, difficult and, at times, sometimes questionable.  Graeber clarified and expanded my own insight about the nature of debt.  He made me see world history in a new light.  I wonder about some of his assertions, but do not have the knowledge to refute.  I would willingly take a semester course with this as a textbook.

You can click on the title above to get Graeber’s outline of his idea for the book.   In what follows I’ll try to explain what I got out of it.

The crushing burden of student debt

Student loan debt is the one form of U.S. debt that is still going up, and, as Mike Konczal pointed out, student debtors are treated much more harshly than ordinary debtors.

If I am driving around while texting, and I negligently run over and kill a child, or if I am in a gambling institution and I have an 11 and the dealer has an ace, and I mistakenly double down and get a huge gambling debt—those kind of debts—hurting someone, killing someone, gambling debts—are treated less harshly under our bankruptcy code than the debts associated with trying to educate yourself.  Student loans are the most repressive debts under the legal structures that we have.  These are democratic bills!  People voted for them.  Hillary Clinton voted for the 2005 bankruptcy bill.  Biden voted for it; Biden pushed it.  These are things we have chosen, and they are incredibly repressive.

via n+1: Debt.

The problem with student loan debt is not just predatory lending, but the interaction of predatory lending, escalating tuition rates and the meme that a college degree is necessary to economic survival.  Student loan debt would not be a problem if (1) we had a full employment economy in which a hard-working high school graduate could make a decent living, (2) we once again had public university systems offering a college education at free or low tuition to anyone capable of doing college work, (3) we had community colleges offering job training (which is different from education) at free or low tuition, since employers no longer do so and (4) employers asked for educational credentials only when they were relevant to the job requirements, such as for engineers or nurses.  But I don’t see how to bring about any of these things anytime soon.

Click on Why Tuition Has Skyrocketed at State Schools for background by Catherine Rampell of the New York Times on why college education is no longer affordable for average middle class and working class families.

Click on Degreeless in Debt: What Happens to Borrowers Who Drop Out for a report on the plight of student debtors who drop out of collage.  More than half of the students who enroll in four-year, for-profit colleges quit before getting their degrees.

Click on Student loan debt up, all other kinds down for facts and charts from Doug Henwood.

Click on Education Debt in the Ownership Society for thoughts of Pamela Brown of the Occupy Student Debt Movement.

Click on “Fix the Economy, Forgive Student Loan Debt” for an article by Minjae Park for the Washington Monthly on the proposed Student Loan Forgiveness Act.

Medicine for an economy sick with debt

Ratio of total U.S. debt to U.S. economic output

Our great recession is due to the bursting of a debt bubble, and not just the normal ups and downs of the economic cycle.  We had an economy in which many and maybe most Americans were unable increase their earning power, but maintained their material standard of living by going deeper into debt.  As long as the real estate bubble and the stock market bubble lasted, they were able to keep on borrowing.  Now that the bubble has burst, and it is time to pay up.

The old Keynesian medicine doesn’t seem to work.  As long as the government pumps money into the economy, there is some recovery, but noy enough to keep going when the government stimulus ends.  Paul Krugman proposes a stronger stimulus.  If deficit spending can spark sustained economic growth, he says, that growth will make it possible to pay down the debt in the long run.  Very true, but what if it doesn’t?  What if deficit spending just adds to the deficit and nothing more?

“Austerity” doesn’t work either.  Cutting necessary government services — schools, road maintenance, public health — just creates a different kind of deficit, if you look at things that way.   This “saving” is going to have to be made up by much more spending in the future.

Meanwhile we’re stuck.  As Sarah Jaffe of AlterNet put —

The student loan debt alone is going to be a trillion dollars sometime in the next couple of months. That’s a trillion dollars that we’re all paying in interest to Sallie Mae, to Citibank—mine was with Citibank for several years—to Wells Fargo, to Discover Card Services, which bought a bunch of student loan debt recently, and to the federal government. But we’re not paying that into our local businesses. We’re not paying this into the corner store. We’re not paying this to the farmer’s market. We’re not paying this to anything. We’re not buying a home because we have student loans or we’re not going back to school because we have a home loan.

Debt has been a substitute for wage increases in this country for about the last thirty years, give or take.  Real wages haven’t gone up in a really long time.  We’re mortgaging our future on credit cards and home equity.  And when the housing bubble popped, and the credit markets froze, we suddenly realized exactly how little we had that wasn’t promised to somebody else already.  It becomes a drain on the future. 

via n + 1: Debt.

Inflation is one historic method by which nations have made their debts go away.  We don’t want to go that route.

The other historic way to address the debt problem is to “restructure” the debt—have people pay what they can afford, so much on the dollar, and chalk it up to experience.  The creditors learn to be more careful in the future when they lend money.  The debtors find that it is much more difficult to borrow money.  Both are able to move on to new things.

During the 2008 election campaign, there was talk of something called “cramdown”—giving federal bankruptcy judges the authority to restructure mortgages in hardship or legally cloudy cases.  Various proposals have been advanced for giving relief on student debt.  Internationally, government debt crises almost always result in a restructuring of debt, but usually after a period of “austerity” in which the public is subjected to higher prices, lower wages, higher taxes and denial of essential government services.

I think that when you borrow money, you have a moral obligation to make a good-faith effort to pay back the money.  But when a borrower is honestly unable to repay a loan, it means both the borrower and the lender have acted unwisely (or are the victims of bad luck), and they both should suffer.  The lender suffers by taking a loss; the borrower suffers by having to pay up to the limit of what they can and by not being able to borrow in the future.  But you cut short the agony.  You make it possible to start fresh.

Click on n + 1: Debt for a panel discussion of debt by David Graeber, author of Debt: the First 5,000 Years; Mike Konczal of the Roosevelt Institute; Brian Kaltenbrenner of Occupy Student Debt; and Sarah Jaffe of AlterNet.

Click on Okay, Folks, Let’s Put Aside Politics and Look at the Facts for useful charts and information from Henry Blodget of Business Insider.   Blodget is a Wall Street guy who thinks the answer to the federal budget deficit is a combination of tax increases and cuts in Social Security, Medicare and Medicaid.  My problem with this is that Social Security (contrary to the propaganda) is solvent and Medicare delivers health insurance more efficiently and at lower cost than for-profit health insurance systems.  It is true that Medicaid spending is a problem, but I think a solution needs to be something other than denying essential medical care to poor people.  That said, Blodget provides a great deal of good information.

Click on Hubbert’s Third Prophecy for more useful charts and information from ClubOrlov.  The post concludes with an argument against banking as such, which I don’t understand and with which I probably would disagree if I did understand it.  That said, there is a lot of good information, as well as food for thought about exponentially increasing debt in a world that cannot sustain exponentially increasing economic output.

Click on Parsing the Data and Ideology of We Are the 99% for an analysis by Mike Konczal of the demands of the people on the “We Are the 99 Percent” Tumblr page.  His conclusion was that their basic demands were debt relief and the means of basic economic survival.