Guest Post: Is Debt Repudiation a Good Thing or a Bad Thing?

Washington’s Blog

Preface:  I hesitated in posting on this subject, as I thought it might be too “radical”.

But after reading what economists Steve Keen, Michael Hudson and Murray Rothbard said about debt repudiation, I decided to post it.

This essay rounds up arguments for debt repudiation, because that side is rarely heard. But feel free to post comments on why debt should not be repudiated – the issue is still an open question in my mind.

As I noted in November:

Debtors are revolting against exorbitant interest rates and fees and other aggressive tactics by the too big to fail banks. See this, this, and this.

Congresswoman Kaptur advises her constituents facing foreclosure to demand that the original mortgage papers be produced. She says that – if the bank can’t produce the mortgage papers – then the homeowner can stay in the house.

Portfolio manager and investment advisor Marshall Auerback argues that a debtor’s revolt would be a good thing.

And even popular personal finance advisor Suze Orman is highlighting the debtors revolt phenomenon on her national tv show.

Walking away from home mortgages has actually become mainstream, being trumpeted by:

  • Many others

In addition, as I pointed out in February:

There is an established legal principle that people should not have to repay their government’s debt to the extent that it is incurred to launch aggressive wars or to oppress the people.

Matt Taibbi wrote Monday:

As powerful as these Wall Street banks may seem, they are also exquisitely vulnerable. Right now virtually all of them are dependent upon the government keeping accounting standards lax enough for all of them to claim to be functional businesses. It is generally accepted that if the major banks on Wall Street were forced to mark all of their assets to market tomorrow, they would all be either insolvent or close to it.

Thus their “healthy” financial status is already illusory. So imagine what would happen if large numbers of those dubious loans on their balance sheets that they have marked down as “performing” were suddenly pushed ahead of time into the default column. What if Greece, and the Pennsylvania school system, and Jefferson County, Alabama, and the countless other municipalities and states that are wrapped up in these corrupt deals just decided to declare their debts illegitimate and back out?

I think it’s an interesting question and would like to hear what knowledgeable people in the field have to say about it. But the big picture, to me, is that these companies are almost totally dependent not only upon the continued good faith of aggrieved debtors, but upon the government recognizing the (sometimes fraudulent) loans made to those debtors as fully performing.

Similarly, Gregor MacDonald argued in February 2009:

The private sector debt in the United States exerts the same power over the banking system as the public debt of the United States exerts over our international creditors. Collectively, the debtors are in control. Not the creditors. This is why the the Creditors, not the Debtors, will be making most of the concessions in the years ahead. Whether the US public debt is inflated away, rescheduled, or repudiated–or some combination of all three–it doesn’t matter much. The process is already underway.

Former Managing Director and board member of Wall Street investment bank Dillon Read, president of Hamilton Securities Group, Inc., an investment bank, and former government servant Catherin Austin Fitts wrote Tuesday:

Look up “fraudulent inducement.” My position as the former Assistant Secretary of Housing-Federal Housing Commissioner and then as lead financial advisor to the U.S. Department of Housing and Urban Development is that the majority of the mortgages originated in the United States after 1996 were fraudulently induced.

The way to deal with criminals is to treat our contracts with them in a manner reciprocal to how they have treated their contracts with us.

Will a growing movement to abrogate contracts with institutions who have broken the law be disruptive? Yes. Will that require painful adjustments? Yes. That is the price we pay to deal with the challenges we face. This includes the fact that the banks have sold criminally originated debts to our pension funds and retirement accounts as well as to allies and institutions around the world.

It is much less painful, however, than the price we will pay if we continue to operate by a double standard whereby large institutions and a small group of people are permitted to live and operate above the law. So let’s address the lawlessness in the financial sector, face the national security issues involved in using our financial markets for economic warfare and begin the transformation.

Austrian economist Murray Rothbard wrote in 1992:

I propose … out-right debt repudiation. Consider this question: why should the poor, battered citizens of Russia or Poland or the other ex-Communist countries be bound by the debts contracted by their former Communist masters? In the Communist situation, the injustice is clear: that citizens struggling for freedom and for a free-market economy should be taxed to pay for debts contracted by the monstrous former ruling class. But this injustice only differs by degree from “normal” public debt. For, conversely, why should the Communist government of the Soviet Union have been bound by debts contracted by the Czarist government they hated and overthrew? And why should we, struggling American citizens of today, be bound by debts created by a … ruling elite who contracted these debts at our expense?


Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The first wave of repudiation of state debt came during the 1840’s, after the panics of 1837 and 1839. Those panics were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States. Riding the wave of inflationary credit, numerous state governments, largely those run by the Whigs, floated an enormous amount of debt, most of which went into wasteful public works (euphemistically called “internal improvements”), and into the creation of inflationary banks. Outstanding public debt by state governments rose from $26 million to $170 million during the decade of the 1830’s. Most of these securities were financed by British and Dutch investors.

During the deflationary 1840’s succeeding the panics, state governments faced repayment of their debt in dollars that were now more valuable than the ones they had borrowed. Many states, now largely in Democratic hands, met the crisis by repudiating these debts, either totally or partially by scaling down the amount in “readjustments.” Specifically, of the 28 American states in the 1840’s, nine were in the glorious position of having no public debt, and one (Missouri’s) was negligible; of the 18 remaining, nine paid the interest on their public debt without interruption, while another nine (Maryland, Pennsylvania, Indiana, Illinois, Michigan, Arkansas, Louisiana, Mississippi, and Florida) repudiated part or all of their liabilities. Of these states, four defaulted for several years in their interest payments, whereas the other five (Michigan, Mississippi, Arkansas, Louisiana, and Florida) totally and permanently repudiated their entire outstanding public debt. As in every debt repudiation, the result was to lift a great burden from the backs of the taxpayers in the defaulting and repudiating states.


The next great wave of state debt repudiation came in the South after the blight of Northern occupation and Reconstruction had been lifted from them. Eight Southern states (Alabama, Arkansas, Florida, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia) proceeded, during the late 1870’s and early 1880’s under Democratic regimes, to repudiate the debt foisted upon their taxpayers by the corrupt and wasteful carpetbag Radical Republican governments under Reconstruction.

Ambrose Evans-Pritchard wrote in 2009:

In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.

Economist Steve Keen is also calling for a debt jubilee, stating:

We should write the debt off, bankrupt the banks, nationalize the financial system, and start all over again.

We need a twenty-first century jubilee.

[We’re going into] a never-ending depression unless we repudiate the debt, which never should have been extended in the first place.

If we keep the parasitic banking sector alive, the economy dies. We have to kill the parasites and give a chance to the real economy to thrive once more and stop the financial [crooks] doing what they did this time around ever again.

And economist Michael Hudson – who also calls for a debt jubiliee – wrote yesterday:

The only way to resolve the [European debt crisis] is to negotiate a debt write-off…

The most cynical (but not necessarily inaccurate) view of debt I’ve seen is that banks loan out imaginary money they don’t really have, which money is “collateralized” by capital they do not really have, which is, in turn, based upon central bank printing presses which create money out of thin air which the central banks don’t really have. But then when debtors have trouble repaying onerous loans, the bankers seize real assets. See this and this.


In First National Bank v. Daly (often referred to as the “Credit River” case) the court found that the bank created money “out of thin air”:

[The president of the First National Bank of Montgomery] admitted that all of the money or credit which was used as a consideration [for the mortgage loan given to the defendant] was created upon their books, that this was standard banking practice exercised by their bank in combination with the Federal Reserve Bank of Minneaopolis, another private bank, further that he knew of no United States statute or law that gave the Plaintiff [bank] the authority to do this.

The court also held:

The money and credit first came into existence when they [the bank] created it.

(Here’s the case file).

Justice courts are just local courts, and not as powerful or prestigious as state supreme courts, for example. And it was not a judge, but a justice of the peace who made the decision.

But what is important is that the president of the First National Bank of Montgomery apparently admitted that his bank created money by simply making an entry in its book …

The judge voided the mortgage, since he found that the bank hadn’t given any real consideration, but simply created money out of thin air.

In other words, according to the most cynical view, the entire debt-money system is a scam … and should be repudiated.

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About George Washington

George Washington is the head writer at Washington’s Blog. A busy professional and former adjunct professor, George’s insatiable curiousity causes him to write on a wide variety of topics, including economics, finance, the environment and politics. For further details, ask Keith Alexander…


  1. The humanity

    The alternative to debt jubilee is generational debt peonage. As more municipal scams like the one in Jefferson County Alabama (as recently explained by Matt Taibbi) come to light, there will be increasing understanding of the way all levels of government are being used to pile debt onto the tax payer, and then use the power of government to collect the debt and hand it over to the TBTF who set up the cons and who effectively control that government.

    The problem of course is that the collateral damage of repudiation may well be civil society, in all its dimensions. This is undoubtedly by design, and was intended as a feature by the architects of the loot, pillage and collect captured rent economy.

  2. craazyman

    Corporations strategically repudiate debt all the time through bankruptcy filings. So do real estate developers.

    Not sure why the issue would be “radical” if the little guy does it. Not sure why morality is deemed to be different for the little guy than for a collection of little and not-so-little guys called a “corporation”.

    Actually, I am sure, but my ramble on that theme might bore the board to snoring and stray seemingly far off topic.

    Debt repudiating homeowners will have to face the legal and financial consequences, just as debt repudiating corporations do. Each pathway forward has pros and cons.

    Good run down, as always, George. Thanks for your efforts.

    1. Greg

      Once again we are talking about different things as if they are the same.

      Steve Keen is talking about PRIVATE debt repudiation and so is Michael Hudson. Rothbard is talking about PUBLIC debt. I’m not exactly sure what the currency status of those countries was when Rothbard made his comments but if they were pegged or if the countries were unable to issue their own currencies the ramifications are very different.

      Iceland is completely within it bounds to repudiate its Euro denominated debt but were the US to repudiate its $US denominated national debt it would not help us at all.

      A private debt jubilee would free up income for the consumer and truly be a stimulus. Cancelling federal debt would not be a stimulus at all. Those people dont want to spend that money anyway, thats why they bought bonds. Making them cash the bond in will only stimulate some other asset class but do nothing for aggregate demand.

      Its really getting tiring seeing people talk about all debts as if they are alike.

  3. standingonmelaurels

    “And why should we, struggling American citizens of today, be bound by debts created by a … ruling elite who contracted these debts at our expense?” (Rothbard)

    So let’s just make all laws assinine by assuming that we can always break them if we don’t like them, thus rendering them largely valueless in the first place. What happened to “caveat emptor”?

    “…debt which never should have been extended in the first place.” Perhaps, but equally should never have been taken on in the first place – but never mind, let’s forget that side of the equation.

    And what happens to savers? Do we just start all over with a new currency in all but name and shaft everyone because the unfortunate-but-mindless have been shafted?

    Must the fittest fall with the most fallible?

    Many solutions have been proposed to screw the banksters – this is not one of them – it doesn’t separate the wheat from the chaff.

    1. Francois T

      “So let’s just make all laws assinine by assuming that we can always break them if we don’t like them..”

      Strawman deluxe heh?

      “What happens to savers?” Do savers are entitled to an absolute God-given guarantee that nothing will ever happen to their money? What happened to “caveat emptor”?

      1. standingonmelaurels

        Well clearly I meant ALL savers, not those equally unfortunate in choosing the same wrong institutions as the borrowers who made unthinking mistakes with the amount of their debt.

        1. Amateur Socialist

          Who made the larger more egregious and unthinking mistake: The borrowers who signed the loan agreements? Or the loan officers and their managers and execs who were well paid to correctly assess and mitigate risks by the lending institutions?

          Both parties will ultimately suffer in this scenario but I think the lenders bear a greater responsibility. I’ve had it with this “irresponsible debtors” meme – the borrowers didn’t collect salaries and bonuses based on how well they managed loan transactions (or didn’t).

  4. attempter

    Radical? Under the circumstances, debt jubilee is rational and relatively moderate.

    It’s always been obvious that the people don’t owe odious debts, and only the same gangster methods which imposed such “debts” in the first place could ever then enforce them.

    As for any alleged economic drawbacks, that’s a joke I no longer listen to. The system is unsustainable, and every day it continues its crimes does nothing but generate more phony “wealth” while stealing and destroying more real wealth and guaranteeing that when the final crash inevitable comes, it’ll be far more cataclysmic. We should’ve renounced the debts and let the bubble deflate in 2008. We should still do so.

    I hadn’t previously seen the concept that when banks loan this phony money they’re actually not giving any consideration, and therefore no contract has been incurred. But that’s a good point for anybody still squeamish about the formalities even under this hijacked “law” and these lawless “contracts”.

  5. Ishmael

    Raises a number of questions:

    What happens to the banksters who lead us here. Do we let them keep their stash and live like medieval lords while everyone else lives like a serf.

    Do we also repudiate all unfunded entitlement and pension obligations? These unfunded liabilities are greater than the debt you are talking about.

    Do we repudiate all debts and let those who borrow the most recklessly make the most out of it.

    My general response to all of these questions is no. We need to approach this problem in a more surgical manner.

    1. Unfunded entitlements need to be scaled back (and not means tested since then those who paid in most will be screwed most). Social security age needs to be raised and I would also look at all the people getting social security disability. I know several getting these checks who could work at least part time and most full time.

    2. Medicare will need to be cut back and the new health care plan redone with a more honest plan.

    3. Pensions significantly reduced. These were just pay offs.

    4. Funds confiscated from all banksters and politicians and their families going back 20 years.

    5. A significant default on external US debt. A cost to the world for providing a police force.

    6. Government spending cut by 75%. Privatize everything.

    7. Banks that are insolvent should be restructured and long term debt holders should pay along with the equity holders.

    8. Homes where the mortgages can not be paid should be seized and auctioned off. There should not be windfall profits to the biggest speculators.

    9. Going forward all bills passed need to be full funded each year. Acutary assumptions should be 1% to 2% returns. No more ponzi schemes.

    10. Is should be noted that after this and any repudiation, the ability to raise capital will be nonexistent. The ability to raise capital and charge interest is what lifted the western world out of the dark ages and started the renaissance so be very careful with this issue. It could have ramifications for a 100 years.

  6. pebird

    I wish it were as simple as a wholesale debt jubilee.

    Unfortunately, a lot of the institutions who own debt are pension funds, individual retirement plans, as well as individual savers. While a large portion of the repudiation would fall on those who were responsible for the crisis, there would be a lot of collateral damage to clean up.

    The irony is that if we had a government that could control the inevitable clean up from a jubilee, we would have a government that could start the clean up now – but we don’t so we won’t.

    At the national/global level, it makes sense. Greece should repudiate and/or restructure its debt and go leave the EU – which is actually taking responsibility for their situation and working it through – they need their own currency and by refusing to use the “crutch” of the Euro can focus on their problems and at least control their own pain. Same with Iceland.

    There will continue to be restructuring taking place – as others have noted – it just won’t be wholesale – we have additional debt crises and various bailouts over the next decade.

    There isn’t much more that can be squeezed directly from individuals for now – the next phase in this crisis is squeezing moderate sized public entities – smaller countries and large states within countries. “Sovereign” debt (Greece really isn’t sovereign) and municipal bonds (California’s economy is roughly $1.8 trillion, Greece’s GDP is $350 billion. Greece actually has more options than California.

    1. The humanity

      “Unfortunately, a lot of the institutions who own debt are pension funds, individual retirement plans, as well as individual savers. While a large portion of the repudiation would fall on those who were responsible for the crisis, there would be a lot of collateral damage to clean up.”

      That’s really at the heart of it. Given the scale of the fraud, and the interlocking complexity and (capital flow) speed of the finance system, any sort of jubilee is going to harshly penalize untold scores of innocent savers who have acted as prudent individuals, while the banksters have already pocketed unfathomable riches. It really makes one wonder at the systemic behavior that brought us to this point

      1. Amateur Socialist

        “It really makes one wonder at the systemic behavior that brought us to this point”

        Quite so. And more to the point of this post – if the behavior is indeed systemic (looks that way so far) then the solution probably is too.

        Tear it down. Start over. ( I type this realizing I’m too old to know much about what “start over” will eventually mean and I’m not too unhappy about that. )

  7. E5

    Are talking about individuals repudiating their own personal debt that they consented to take?

    Or are you talking about a country repudiating a national debt that the individuals didn’t consent to take, but was taken (allegedly on their behalf) that they are now forced to pay for?

    You seem to be mixing the two and causing confusion for ppl such as “standingonmelaurels”.

  8. Bill

    Murray Rothbard FTW. Anyone who compares the modern banking system to communist Russia has a +1 in my book.

    1. The humanity

      I would go farther and compare our entire system to communist Russia. We may have more flavors (channels) of statist propaganda on our flat screens, but in both cases the vast majority of the populace sees the fruits of its labors go to a small upper crust without any real say in the matter.

  9. Tom Whipple

    To me it seems reasonable that debts incurred through fraud by lenders be repudiated. I’m generally in favor of paying debts, but it is hard for me to see debts owed to con men as sacred.

  10. froggyalley

    E5 says:”Are talking about individuals repudiating their own personal debt that they consented to take?”

    I consented to take the debt at 4.9%, not 29.9% that they jacked the APR up to, for no good reason. NONE. Always on time, never overlimit, not in “universal default” anywhere.

    They’re greedy bastards and I curse them all with a plague of boils on their backsides!

      1. attempter

        He said no.

        Besides, the system has been intentionally set up to make it very difficult to function in anything approaching a “normal” way without taking on lots of debt.

        One of the goals of turning people into debt slaves is social control and a more docile work force (a debt slave desperate to make his payments is less likely to be a “troublemaker” at work, eh?). Greenspan openly boasted about that felicitous effect.

        I also love how most of the same people who support the Bailout, saying, “if the banking system collapsed, where will credit come from while everything’s been so disrupted?” will then turn around in a case like this and say “your debts are voluntary”. Which of course contradicts the contention that we just haaaaaad to bail out the banks.

        Why did we have to bail out the banks, if debt is so voluntary? These people really need to get their story straight.

        (I don’t mean E5 himself supports the Bailout. I have no idea if he does. But most of these debt moralizer types do.)

      2. Adam

        “so did you or did you not consent to take the debt?”

        Unfortunately this logic is part of the problem, because its irrelevant! Bad debt is bad debt and denying the loss does not mean the loss didn’t occur even though it makes us fell better. The only real question to answer is, How are we going to clean it up and pay for it?

        Or course the clean up is already going on, but since we really never asked the real question of “How are we going to clean it up”, the answer is being forced upon us. Michael Pettis has a great review of the 1990’s bad debt clean up in China and Japan.

        It would seem that for the average person both nations pick a sub-optimal route. It seems that the politically easy route is always sub-optimal.

  11. MattJ

    I have always thought that that would be the end game, but I do not believe that most people calling for it have accepted all of the consequences. In particular, debt repudiation will have to include all unpayable debts, include public pensions and federal entitlements.

  12. Septeus7

    What’s wrong just having a bankruptcy reorganization where the debt is triaged under a Glass Steagall like standard that separates debt associated with the necessary commercial functions of the banking from the speculation? Why is no one talking about a system wide bankruptcy reorganization?

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