today’s crazy idea: pardoning all our debts

January 6, 2012

Sometimes you come across an idea that at first sounds far too crazy to ever work. But then, as you think and do a little mental math, you find that it actually makes perfect sense despite running contrary to everything you would think should happen. One such idea calls for worldwide forgiveness of national and personal debts to get us out of the ongoing global economic turmoil, and not in the form of a leveraged buyout or new plans for repayment mind you, but that of a full on debt jubilee. Sound utterly absurd, doesn’t it? Giving up on money you lent without getting a significant portion of it back in even the best case scenario? How will that help? Isn’t the whole point of lending money to get it back with an interest payment in the first place? With trillions in debt around the world, surely this would only make things much worse for everyone as banks trying to collect have to write off billions since a similar dilemma triggered the Great Recession in the first place. But then again, if we consider one simple fact, this suggestion may not be as insane as it may seem. After all, there’s a reason why the banks and governments are trying to collect those trillions. Because their debtors don’t have them.

Consider the following situation. You lent money to someone who used it to buy a new car and were getting a regular payment every month on the debt. However, things changed and the person lost his job. You took the car back but there’s still a lot of money owed on it and because a lot of other people lost their jobs, selling this car to get your money back is proving to be very difficult. Meanwhile, your debtor stopped paying you altogether because he chose food over paying back the debt. What are you going to do now? If you’re a mobster, you can send in Vinny with the brass pipe, but as a more or less respectable lender, all you can do is demand that he pays you and send nasty letters to credit agencies about his ability to honor his debts. You could hire a major collections agency to harass him but ultimately if he won’t pay, there’s no legal way to force him to do it over a small wage garnishment if he manages to find a job. After expending all the time, effort, and yes, money to file complaints and hire all the collection reps, you still don’t have much cash back. Your debtor just doesn’t have that money and all you have is the fantasy of getting it back and a note that someone owes you that cash. And at some point you’re just going to have to cut your losses and live with the situation or you’ll lose even more in your attempts to recover the money that isn’t actually there and may never materialize anyway.

Many lenders across the world are in the same situation. With widespread unemployment across the world’s economies, yawning national debts, and failing banks on life support all around them, their debtors aren’t very likely to have the money to pay them back and in some cases, their hounding actually interferes with whether they can even get a job to pay them at all. When banks refuse to modify loan payments or harass debtors, they effectively shoot themselves in the foot by sabotaging a method of getting their money back to some degree in the near future while building ill will with their debtors, giving them every reason to think that there’s absolutely no way to reason with them, and trying to create an alternative debt repayment plan and just walking away with no additional payments will have the same exact consequences. Given the pressures of survival, they will opt for simply walking away more often than not under these circumstances. Banks win nothing, the debtors lose across the board, nobody is happy, and the banks may now have to ask for new handouts because for some odd, inexplicable reason, their debtors aren’t paying them back. So a debt jubilee is basically saying "forget it, we’re just going to start over." Of course there’s the moralistic downside of excusing debtors who acted in bad faith and falsified information, but in the grand scheme of things, banks don’t exist to enforce morality.

Lenders are in business to make money and relying on imaginary money that should come any day now from the deadbeats is not profitable. Instead of demanding cash they’ll never see or growl about giving debtors an easy way out, they should simply make it hard for those whose debts are forgiven to take on new loans until a new track record of good payments can be established and let those bad debts go. This way, those who stay current and repay their debts on time are given great borrowing terms as a reward, while those whose debts were discharged would be denied all but the absolute basic lending services as a punishment, much like we already do. Bad debts are cleared, companies can now operate with more freedom, people under a crushing debt can finally breathe out and start spending and stabilizing themselves. This would be especially true for a household in which a medical emergency triggered a default since people don’t have a choice in getting sick, and medical care can be exorbitantly expensive, resulting in six-figure medical bills few can pay. Though, as a world fatigued by three years of debt crises recovers through debt forgiveness, there has to be an agreement that no one can continue the status quo and trigger another such debt crisis, an agreement what will be hard to reach once the global debt forgiveness genie is out of the bottle and can be summoned again…

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  • Paul451

    The problem is that some people buy certain low-risk debt (such as US Treasury bonds) as a safe-haven way of protecting their savings. “Forgiving my debt” means “Wiping out your life savings”. The Leviticus idea of a Debt Jubilee was to forgive only those enslaved by debt (or farms lost to debt), not all debt.

  • Greg Fish

    That’s a very good point Paul. Can’t believe I missed that.

    Even if we stick to the original idea of only forgiving debts that just can’t be reasonably collected, we’d have several tens of millions of people have their bond assets wiped out overnight. Any ideas on how to work around that?

  • At the very least this should be done for egregious student loan debt, which isn’t affected by a declaration of bankruptcy. Go any length of time unemployed (or any sort of deferment) and the interest on those loans just pile up, making it incredibly difficult to pay off even with a stable, decent-paying job. I know from experience.

    I don’t envy current/recent undergrads who had to pay even more than I did and will be burdened for life just to get the education they were told they needed to get jobs that either don’t exist or don’t pay enough now.

  • Paul451

    “Any ideas on how to work around that?”

    Not a one. In the Leviticus era, “debt” was always one-to-one. You borrowed money directly from a wealthy person. The debt relief every Jubilee for those who have been unfairly punished by usury not only saved the victims, importantly it also punishes the most aggressive and usurious lenders.

    Nowadays everything is so tangled together, it’s hard to imagine how to cut one string without unravelling the entire tapestry.

    If it wasn’t so tied up, the GFC would have never happened in the first place. If some lenders had lent to high risk borrowers at the peak of a boom, they would have failed like any poorly run business. Serves the same purpose as the Debt Jubilee. There might have needed to be some Federal relief for depositors who got screwed, but that’s about it. It wouldn’t have contaminated the entire financial system.

    Worse, I think the general idea is wrong. Defaulting on US government debt wouldn’t increase spending and hiring in the US, nor would it make Congress suddenly sane, nor would it eliminate the Chicago-school “Austrian” economists preaching supply-side and austerity. And it would reduce domestic savings since a high percentage of US bonds are domestically owned (something like 90%. Too lazy to google it now,) so the net effect would mostly cancel out anyway.

    Student loans are a separate (and very American) phenomenon. Since interest rates on Federal debt are near zero, the US government could create a voluntary scheme to “buy out” student loans (via a progressive system, the lower your income, the more of the loan they take over.) Ie, this would transfer private debt to public debt, not default on debt. The usurious nature of student loans in the US is something that screams out for a debt jubilee.

    (They could also offer new students zero interest loans on courses, but that would likely cause course prices to rise, cancelling out any benefit.)

  • Jypson

    Great comments Paul. Our current financial / economical climate really has no fix, big or small. The best “our greatest minds” in office can come up with is to delay the inevitable crash of the system. I only hope we learn from our mistakes and institute a more comprehensive system next time.

  • Bob

    This is absolutely crazy, because it will never ever happen. Do you think China is going to forgive the United States of all its debt? “Ya, we’re just going to let you have all the resources we gave to you over the last 50 years, so you could be prosperous and we cant, no big deal…” Debt forgiveness is not the answer. Forgiveness of debt tells people it’s OK to be irresponsible, and the problem will only manifest itself again and again. Debt forgiveness got us into this mess, and it is exacerbating the problems of this economy. Plus that article fails to illustrate the fact that debt forgiveness for individuals does exist to some extent, it’s called bankruptcy. Bankruptcy laws allow you pay off debt at a slow pace, not all of it, while lowering the costs of legal fees to the lender. Yes, it destroys your credit, and it should. But you get out of debt. We will never live in a utopian world where everyone gets everything for free, which is essentially what this article suggests. The forgiveness of debt will stir negative feelings in responsible people who didn’t get bailed out and blow up the huge sense of entitlement people already feel today.

    First, this article assumes there would be jubilee if this were to happen. I think that is a false assumption, but at the very least, it is an assumption based on nothing. First, this would severely increase our debt. There will not be a jubilee about this. There are a growing number of Americans who believe that the government should not be in the business of debt forgiveness at all. Thirdly, people who work and pay taxes will be paying off the mortgages of people who defaulted and still be expected to pay their own. How is that fair? And the fact that you say “people won’t learn” is a moral statement: It is fact. You cannot deny the fact that as government creates new entitlement programs, people feel more entitled. And when the government entitles people to a bailout in the case of this absurd debt forgiveness, people will feel from that point forward that it is the government’s responsibility to bail out its citizens. The main fallout from this will be extreme inflation. Money is debt of the Federal Reserve, and when you end all these bad mortgages, then guess what? Money that didn’t exist in the economy before, is now there and will cause inflation. The last thing you want in a downed economy is inflation without the economic growth to back it up. This is called stagflation, and it is a terrible thing. The article spoke of a worldwide debt forgiveness. That is NEVER going to happen, and mere discussion about it is ludicrous.

    And another thing, like I said money is debt of the Federal Reserve, and we’re talking about forgiving all debt, people better be ready to turn all of their liquid assets over to the Fed.

  • Buddy Rojek

    Debt Jubillee = future higher interest rates for all!

    Those who don’t pay will have to scrimp and save for that new Ipod.

    Those that maintained a good credit rating will pay for the “debt forgiveness”.

    Lowering the interest rate is correct, as it allows the borrower to repay capital. The profitability of the lender suffers, but they get their capital back.

    People should never borrow more than they can afford, and unless they have secure jobs. Everybody else needs to save, if they don’t have job security. This is common sense.

    On the other hand, banks should never lend to borrowers who may be of legal age to form contracts but don’t have the necessary “intelligence” to comprehend what they are getting into. i.e. The contract was null and void to begin with.

    And as an ex Auditor, I was horrified that the banks were lending like theyt were. The Sales guys were in charge, and the internal auditors and risk guys were warning the CEO. But the CEO was addicted to rising profits and share price (His bonus)

    The Banks who were involved in this should have failed. It would have been a lesson for all money managers.

    The bailouts to banks was the biggest scaremongering and theft in the history of mankind.

    A travesty.