Idea of a debt Jubilee takes shape, gains a little steam

Last updated on: October 24, 2011 at 4:56 pm by Fred Clark

Idea of a debt Jubilee takes shape, gains a little steam 2011-10-24T16:56:11-04:00 Fred Clark

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And you shall proclaim liberty throughout the land to all its inhabitants. It shall be a jubilee for you. …

— Leviticus 25:10-11

E.D. Kain of Forbes (!) likes the idea of Jubilee to end or mitigate oppressive debt, noting that the principle has support not just from the Bible, but also from South Park.

A debt forgiveness program is a great idea, but it won’t go far enough if we don’t find ways to breathe life back into real wages, fix our lousy healthcare system, and propel our economy into the 21st century.

Reuters’ Matthew Goldstein and Jennifer Ablan, meanwhile, follow up on their earlier report on the idea of a Jubilee:

Earlier this month, we wrote about how a growing number of economists and even some institutional investors are seeing the need for some meaningful debt reduction – mainly mortgage reductions – to fix the economy. Others are calling for a full-scale debt Jubilee – or debt forgiveness – to get consumers out a deep whole. That’s because without the consumer, the U.S. economy and world economy will like sputter and creep along for years.

But the bankers have been largely silent on the issue of significant debt reduction. And until there’s some true confession from Wall Street about its role in the financial crisis and a real solution for moving beyond the fallout, there’s a good chance the protests will keep on going.

Alex Pareene of Salon — following the lead of David Graeber — also gave the idea a boost, proposing that a debt Jubilee should be one of the main demands of Occupy Wall Street:

So my immodest proposal is simply this: Individuals and households in the bottom 99 percent who owe debt to any large financial institution that received federal government support during and after the 2008 crisis should see their debt forgiven. That would certainly stimulate the economy, as most people would suddenly find themselves with a great deal more money to spend on iPads (and food, and clothing, and housing, and healthcare). The debt can be forgiven by decree or if the government really wants to it can step in to pay it itself; I don’t much care either way. (Though it’d be nice to see it just wiped off the books, to enrage the banks.)

Let’s wipe the debt of the 99 percent off the books, tell the financial sector to eat it, and get on with our lives.

Brian Davey recognizes that it might not be quite that simple, but he explains how a Jubilee could actually work, producing “Debt cancellation without chaos.” His proposal also has the added benefit of reducing the “Too Big To Fail” aspect of the big banks:

… the current dilemma is that if you cancel debts then the bank deposit money created by lending is no longer backed by anything and the banks goes bust. However, this is solvable if the central bank creates an equal amount of non debt money to replace the deposits that are no longer backed by anything.

… So the banks will find themselves with lots of cash but far fewer remaining loans outstanding from households. Because the banks make their money through loans the profitability of banks would fall – but they will still be solvent as they will be sitting on lots of cash. Unlike a straight bank loan write-down this will mean that most banks would probably survive. However, they would shrink in size and importance as their importance is based on the debt they own. If debt is being paid off their power would shrivel. Conversely the burden on households would be reduced – although those imprudent enough to borrow very large amounts would still be on the hook for some of their earlier borrowing.

That addresses much of what Martin Hutchinson and Robert Cyran warn would be “The Downside to a Debt Jubilee.” And the rest of what they fret about — “teaching the wrong lesson” — is sanctimonious nonsense smacked down millennia ago by the same biblical prophets who gave us the idea of Jubilee in the first place. What lesson have lenders learned over the past four years? It’s unseemly to worry about “moral hazard” with regard to the indebted working class, while exempting reckless Too-Big-To-Fail megabanks from the same concerns.

Of course, another way to eliminate some of our odious debt would be to amend our bankruptcy law so that families who are bankrupt could actually declare bankruptcy, as Karina Frayter reports for CNBC: “Bankruptcy Law Change Could Help Consumers Recover.”

In “QE4 – forgive the students,” Ellen Brown proposes a Jubilee similar to Brian Davey’s proposal, but targeted specifically at student-loan debt, which now exceeds $1 trillion:

To prevent another disaster like the one caused by the toxic debts on the books of Wall Street banks, we need to defuse the student debt bomb before it blows. But how?

The Federal Reserve could do it in the same way it defused the credit crisis of 2008: by aiming its fire hose of very-low-interest credit in the direction of the struggling student population. Since September 2008, the Fed has made trillions of dollars available to financial institutions at a fraction of 1% interest; and in audits since then, we’ve seen that the Fed is capable of coming up with any amount of money required or desired. To the Fed it is all just accounting entries, available with the stroke of a computer key.

The Fed is not allowed to lend to individuals directly, but it can buy Treasury securities; and with the Student Aid and Fiscal Responsibility Act (SAFRA) of March 2010, the Treasury is now formally in the business of student lending. The Fed can also buy asset-backed securities, including securitized student debt; and there is talk of another round of quantitative easing aimed at just that sort of asset.

Heather Stewart says a Jubilee would be much likelier to succeed than Angela Merkel’s latest plan to solve the Greek debt by lending them more money:

Erik Britten of Fathom Consulting puts it this way: “The term bailout is used in a number of ways. One of them is allowing a country to finance their deficits without borrowing from the markets, and their debt-to-GDP ratio continues to go up. The other kind of bailout is one that says ‘we accept that we have lost the money that we lent you: we’re writing off that debt’.”

That’s what campaigners against the insufferable burden of developing country debt used to call a “jubilee” – but it’s not exactly what Angela Merkel has in mind.

Germany, which will ultimately pick up the tab, is understandably determined that there must be a heavy price attached to fiscal failure. But Greece’s plight reveals the catastrophic consequences of tackling a debt crisis by handing out more loans while systematically slashing away at the economy’s productive potential.

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