Puerto Rico also has a debt crisis

Puerto Rico’s governor on Monday called for the commonwealth to be allowed to restructure its debts under U.S. bankruptcy code, while a newly appointed adviser to the U.S. territory said it is “insolvent” and will soon run out of cash.

Governor Alejandro Garcia Padilla, in a televised address, said sacrifice must be shared by bondholders, as he called for Washington to allow a bankruptcy debt restructuring.

via Reuters.

I think Gov. Garcia Padilla is right.  If a debtor is unable to pay, this is the result of bad judgment or bad luck on the part of both the borrower and the lender.  They should share the consequences.

There may come a time when this argument has to be made on behalf of the United States as a whole.

How did U.S. courts get to rule on Argentina?

A financial speculator won a decision in U.S. courts against the government of Argentina which could mean years of unemployment, high taxes, cutbacks in public services in that court.

I am mystified about a number of things in this case, including why the U.S. courts have jurisdiction over Argentina, a sovereign country, and how this decision is to be enforced.

Double click to enlarge.

The background is that Argentina defaulted on its government bonds back in 2001.  Between 2005 and 2010, it worked out a deal with bondholders for them to write off about two-thirds of the debt in return for payment of the rest.

This was a good decision from the standpoint of the people of Argentina and, for the bondholders, better than nothing.

But the U.S. courts have negated that deal by ruling that a speculator who bought some of the original bonds for 20 cents on the dollar is entitled to be paid in full.

Default is a serious matter for nations, just as bankruptcy is a serious matter for individuals and corporations, but sometimes it is necessary.

For a head of state or a head of family, it is better to refuse to pay your creditors than to let people who depend on you go hungry.

Government defaults should, like individual bankruptcy, destroy or greatly harm the credit rating of the defaulter or bankrupt.   In practice, this rarely happens as often as it perhaps should.   Banks have so much more money than good ideas for investing it that they soon start lending again to defaulters and bankrupts.

Source: New York Times.  Click to enlarge

But how is it that U.S. courts have jurisdiction over a dispute between sovereign country and its creditors, who are based in many countries?  Is it because the payments go through the Bank of New York Mellon, which is in New York City?

How do U.S. courts propose to enforce their decision on a sovereign country.   Does their jurisdiction over New York City banks give them leverage over the whole world banking system?

It seems to me that this decision is a good reason for Argentina and other countries—including the BRIC group, Brazil, Russia, India and China—to create their own payments system outside U.S. jurisdiction.   Another thing I do not understand is why they have not done this already.  Is it because they fear being locked out of the old system in retaliation, before the new system is in place?

What’s needed is an international bankruptcy court, not under control of any government nor of banks, that could.  Its mission would be to resolve disputes between governments and their creditors when national leaders say they are unable to pay in full, in a way that was fair to the lenders without imposing undue hardships on peoples.

Such a court would have authority to free democratic governments of “odious” debts incurred by previous dictatorships.   Yes, that would make lending to dictatorships risky for banks.  It should be.

LINKS

Supreme Court Dismisses Case Between Argentina and U.S. Vulture Funds by Mark Weisbrot, co-director of the Center for Economic and Policy Research, for US News.  Hat tip for the link to Bill Harvey.

Paul Singer v. Argentina: A Thriller Reaches Its Climax by Ignacio Portes, a Buenos Aires journalist, for Naked Capitalism.

US vulture fund ruling pushes Argentina towards a second bankruptcy by Philip Inman for The Guardian.   [Added 6/28/14]

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.