Kuttner on Debt

CONTENTS:
--Kuttner on Debt
--A Warm Response from Australia

Kuttner on Debt

In his illuminating “The Debt We Shouldn’t Pay,” a review of David Graeber’s Debt: The First 5,000 Years, Robert Kuttner offers some highly relevant insights. He states:

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.

In his book, Graeber concludes:

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.

According to the classical historian Moses Finley, in the ancient world all revolutionary efforts had a single demand: “Cancel the debts and redistribute the land.”

Kuttner reports, “Two thousand years before kings began minting coins, there was credit.” Workers were loaned the means to survive and then worked to pay back their debts. When these obligations became too oppressive, the indebted often revolted.

To discourage revolt, societies made debt repayment a moral issue. “One should pay one’s debts” became a deeply embedded maxim. But according to Graeber, “A lender is supposed to accept a certain degree of risk.”

Economic imperatives have often prompted governing elites to set aside moral concerns. Kuttner writes:

There are times when sound economics requires debt forgiveness....  In a general collapse, debt forgiveness may become necessary if the economy is not to sink further…. 

Before 1706, bankruptcy simply meant insolvency, and the bankrupt was packed off to debtors’ prison.... Once behind bars, a debtor had no means of resuming productive economic life, much less satisfying his debts. In this insight was the germ of Chapter 11 of the modern US bankruptcy code, the provision that allows an insolvent corporation to write off old debts and have a fresh start as a going concern…. 

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. 

The struggles over what was called “the money issue” in nineteenth-century America were also about the terms of credit and debt.... Debt politics as applied to common people usually favored creditors.

The New Deal proved to be an exception (and remains so):

Not until the Great Depression and the Franklin Roosevelt era did the US government become serious about debt relief, with a series of policies that refinanced distressed home mortgages, reformed and recapitalized banks, extended relief to bankrupt consumers, financed a huge war debt at below-market interest rates, and 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.)

The treatment of Germany after World War Two is also instructive.

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.

The current relevance of this history is clear. Despite the widespread preoccupation with government debt, Kuttner points out:

Public debt was not implicated in the collapse of 2008, nor is it retarding the recovery today. Enlarged government deficits were the consequence of the financial crash, not the cause…. It was private speculative debts—exotic mortgage bonds financed by short-term borrowing at very high costs—that produced the crisis of 2008. The burden of private debts continues to hobble the economy’s potential…. We should be discussing how to relieve the burdens of private debts and prevent future abuses of the power of the financial industry to create debt and engage in speculation. 

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.... Corporate executives routinely walk away from their debts via Chapter 11.... Even more galling is the fact that the executives who drove the company into the ground often keep control by means of a doctrine known as debtor-in- possession.... US Airways has gone in and out of Chapter 11 twice. In this process, all creditors are not created equal. Since banks typically have liens on the aircraft, bankers get paid ahead of others. Major losers are employees and retirees, since Chapter 11 allows a corporation to break a labor contact or reduce pension debts.

The so-called “private equity” industry uses tax-deductible private debt to shut down businesses and lay off workers.

In one arena after another, creditors have the upper hand. Kuttner writes:

Homeowners, however, are explicitly prohibited from using the bankruptcy code to reduce their outstanding mortgage debt.... 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 European authorities used a similar double standard in the case of Cyprus, condemning ordinary savers to lose up to 60 percent of their assets, in order to pay for the speculative sins of financiers…. 

Large banks, meanwhile, have benefited from extensive debt forgiveness thanks to governments.... Government simply made the banks whole....  

The earlier emphasis on sin lingers when it comes to common debtors....cloaked in the language of moral opprobrium and “moral hazard,”...

The privatization of Fannie Mae opened the door to more exploitation:

The original Federal National Mortgage Association (FNMA), nicknamed Fannie Mae, was a public entity.... Public FNMA had no scandals, and when it was working effectively, from its founding in 1938 to its privatization in 1969, the US rate of home ownership rose from about 40 percent to over 64 percent. The trouble began when Wall Street invented complex, exotic, and easily corrupted mortgage bonds, and private Fannie began purchasing high-risk mortgages in order to protect its market share. The remedy is to restore Fannie to a public institution with high lending standards, not to kill it.

“Trickle-down economics” is the justification for this bias in favor of creditors. As Kuttner acknowledges, “The entire economy gains from the stimulus to demand” when banks are rescued. But little of value actually trickles down. Current public policy primarily distributes wealth upward. The postwar era, in contrast, with much different policies in place, witnessed “trickle up” economic growth.

Broad prosperity could be enhanced with less hypocrisy. Kuttner refers, for example, to a former IMF official, Anne O. Krueger, an appointee of George W. Bush, who “recently reiterated her call for Chapter 11 bankruptcy for indebted countries.”

Kuttner insists, “These debt traps are not immutable.” But for the near term, he’s not optimistic and concludes his review, “The sheer political power of creditors and the momentum of the austerity campaign suggest that more damage to the economy may be done before any large change takes place.” Regrettably the Obama Administration decided not to make homeowner relief a priority following the 2008 crisis.

It seems that, given so many uncertainties, most elites have decided to take the money and run. To hell with the future.

With less moralizing and more commitment to everyone’s long-term enlightened self-interest, we might shift this nation’s priorities and overcome the current obsession with short-term profits. To achieve that goal, however, we need massive grassroots pressure. And so far all we have are rumblings. Let’s pray those murmurs multiply soon.

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A Warm Message from Australia

Still reading your posts, somewhat irregularly and often belatedly, as time and my other commitments permit.  I can't always answer them as fully as I'd wish, but still: Every one of your messages has something to teach me!

Today, for example, I found your extracts about Camus'  "Algerian Chronicles". Surely that would be worth reading; I'll look it up.  Though if I can find the French original at a reasonable price, I'd prefer that, since it may have nuances one might miss in translation.

About "Transform America":  You're doing good work with that.  From my perspective as a citizen of an American client state, I'd perhaps change the emphasis slightly ... to something like "Transform America - and how she deals with the rest of the planet".

About you - I'm glad you've decided to devote some of your resources to your own needs.  Do please commit to that plan, because:

(a) you're worth it! (which I shouldn't have to remind you, eh?) 

and

(b) selfishly, I know that I - and the rest of the world influenced by the pebbles you cast into the pond - will benefit even more from a refreshed, reinvigorated and more purposeful Wade Lee Hudson. ;-)

Besides, I don't see why an activist, too, can't be happy?