Robert Kuttner provided an interesting article on the topic of debt in the
New York Review of Books. He reviewed the book
Debt: The First 5,000 Years by David Graeber, and took the opportunity to express his opinions on how debt is currently being handled. His chosen title,
The Debt We Shouldn’t Pay, provides a clue as to Kuttner’s sentiments.
Graeber indicates that credit, and thus debt, has been part of human interaction about as far back as one can look. As soon as wealth began to be accumulated unevenly a system of creditors and debtors emerged. Kuttner provides this quote from Graeber:
"....the struggle between rich and poor has largely taken the form of conflicts between creditors and debtors—of arguments about the rights and wrongs of interest payments, debt peonage, amnesty, repossession, restitution, the sequestering of sheep, the seizing of vineyards, and the selling of debtors’ children into slavery."
Kuttner provides this summary of the main issues to be discussed with relation to debt.
"In Graeber’s exhaustive, engaging, and occasionally exasperating book, three themes stand out. One is the "profound moral confusion" in our understanding of debt. A second is the perennial struggle over debt forgiveness, and who receives it. A third is the function of debt in the politics of social class and social control."
The basic business transaction of lending resources should be quite simple. The debtor assumes a risk in borrowing resources that he might not be able to repay. The creditor assumes the risk that his resources might not be returned and charges a fee appropriate to the risk being taken. In an ideal world there is a balance of risks and both creditors and debtors lose occasionally.
However, we are not in an ideal world and creditors, being the wealthy, have easily balanced the scales in their favor. One approach utilized by the wealthy was to turn a pure economic transaction into a moral obligation.
"Graeber observes that debt is often conflated with sin. The version of the Lord’s Prayer drawn from Matthew (used by most Protestant denominations) asks God to forgive us our "debts," while most translations of Luke (and the Catholic liturgy) ask forgiveness for our "trespasses" or "sins." Graeber notes that in modern German, the same word, Schuld, means both debt and guilt. Likewise in several ancient languages."
Thus the debtor who was unfortunate in business was also a sinner and morally culpable. This imbalance in favor of creditors has been an integral part of history and has provided creditors with a range of options for punishing debtors for their sins.
One of the mechanisms that served as both punishment and encouragement for debtors to find payment "somewhere" was the system of debtor prisons. This ineffective and rather counterintuitive approach began to break down when economies became more complicated and economic swings became more severe. When the economy runs on credit and there is an economic collapse, no one can pay their debts. It is awkward for a society to come to the conclusion that all its merchants should be thrown in jail. When economics conflicts with morality, it is usually economics that wins.
"The British devised the concept of legal discharge from debt not out of a sudden attack of compassion but because the economic crisis of the 1690s had put much of the merchant class in jail. The cause was not improvident or immoral behavior on the part of debtors, but general economic dislocation beyond their control...."
Not surprisingly, it was decided that economics was a matter for debtors "of significance." Morals were to continue to be the issue for poorer debtors.
"But when the law was finally enacted, allowing a magistrate to settle debts with partial repayment, only substantial merchants could qualify for relief. Common debtors still languished in jail, since their penury had scant wider consequences."
This difference in approach to the wealthy and the non-wealthy persists to this day. When corporations do dumb things and acquire more debt than they can deal with they are allowed to declare bankruptcy, renege on debts, and then go back in business. When banks do dumb things, their mistakes are covered by the tax payers if the banks are big enough.
"The double standard in debt relief that favored large merchants, present at the creation of bankruptcy law in 1706, persists today in many different forms. It gets surprisingly little attention in the debt debates. Despite the tacit assumption that "surely one has to pay one’s debts," the evasion of repayment is both widespread and selective. Corporate executives routinely walk away from their debts via Chapter 11 of the national bankruptcy law when that seems expedient. Morality scarcely enters the conversation—this is strictly business."
The term "moral hazard" usually comes up when a non-wealthy person gets into financial trouble. Any attempt to bail the poor out runs the risk of encouraging them to continue to do dumb things.
While individuals of any economic standing now have access to debt relief through bankruptcy proceedings, individuals experience more restrictions than corporations.
"Homeowners, however, are explicitly prohibited from using the bankruptcy code to reduce their outstanding mortgage debt. White House legislation proposed in 2009 would have allowed a judge to reduce the principal on a home mortgage, as part of the effort to contain the economic crisis. Congress rejected the measure after extensive lobbying by the financial industry. Consumers may use bankruptcy to shed other debts, but a revision of the law signed by President Bush in 2005 subjects most bankrupt consumers to partial repayment requirements, while bankrupt corporations get a general discharge from their debts. Thanks to the influence of the same financial lobby, the rules of student debt provide that the obligations of a college loan follow a borrower to the grave."
The system of debt peonage that Graeber referred to persists.
Kruttner is particularly outraged by the application of "moral hazard" to nations.
"Proposals for debt relief for....Greece encounter resistance cloaked in the language of moral opprobrium and ‘moral hazard,’ the danger that debt relief will reward and thus induce reckless behavior."
He points out that there is a long history of debt relief for nations, and that some of the countries that benefited the most in the past are now the loudest moralizers when it comes to considering the sins of others.
"....the US ....wrote off some of the international debts of allies and enemies alike. (Britain, America’s closest ally, received near-total forgiveness of wartime Lend-Lease debt.)"
"Germany, today’s enforcer of Euro-austerity, was the beneficiary of one of history’s most magnanimous acts of debt amnesty in 1948. The Allies in the 1920s made the catastrophic error of helping to destroy Germany’s economy with reparations and debt collection policies. In the 1940s, after a brief flirtation with World War I–style reparations, the occupying powers agreed to behave differently: they wrote off 93 percent of the Nazi-era debt and postponed collection of other debts for nearly half a century. So Germany, whose debt-to-GDP ratio in 1939 was 675 percent, had a debt load of about 12 percent in the early 1950s—far less than that of the victorious Allies—helping to produce postwar Germany’s economic miracle. Almost every German can cite the Marshall Plan, but this larger act of macroeconomic mercy has disappeared from the political consciousness of Germany’s current austerity police. Whatever fiscal sins the Greeks committed, the Nazis did worse."
The continued ascendency of creditors (banks) and the determination to conflate moral issues with economic issues has been unwise.
"Another former IMF official, Anne O. Krueger, an appointee of George W. Bush, recently reiterated her call for Chapter 11 bankruptcy for indebted countries. When she first proposed the idea as deputy managing director of the IMF in 2002, Krueger was fairly shouted down by officials of the US Treasury and leading bankers. In January 2013, she argued that ‘a clear mechanism [to allow nations to use bankruptcy] could have prevented all sorts of problems in the eurozone.’ With a Chapter 11 law, Greece could have written off old debt and used new borrowing to finance new growth, just like a private corporation. Even acknowledging past bad behavior (as in the case of many corporate bankruptcies), a Chapter 11 for countries could sensibly combine incentives for honest bookkeeping with macroeconomic policies that write off old debt for the sake of recovery."
Kuttner provides this summary statement:
"The particulars no longer involve the sequestering of sheep or the seizing of vineyards. But the ten million Americans at risk of losing their homes to foreclosure, or recent graduates who cannot qualify for mortgages because of their monthly payments on college loans, have become modern debt-peons. At the same time entire economies abroad, indentured to past debts, find themselves in a metaphoric debtors’ prison where they can neither repay creditors nor resume productive livelihoods."
Nicely said!
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