Bob Kuttner has an elegant and important article at American Prospect, “Debtors’ Prison“. It’s an evocative, historical form of the argument made here and elsewhere: that advanced economies have gone down a disastrously bad path in not writing down debt that can’t realistically be paid.
The usual poster child for “why not writing down debts is a bad idea” is Japan, but that isn’t gripping enough to evoke the right responses. Even though its post-bubble growth has been dreadful, Japan is still a well-run, tidy country with a low crime rate, universal health care, long life expectancy, and tolerable unemployment. That in turn is due to factors that do not obtain much of anywhere else: Japan was very cohesive to begin with, and its elites chose to have their incomes fall relative to everyone else to save jobs. Wage compression at large companies has increased dramatically. This is the polar opposite of what has happened in the rest of the world, where the gap between the haves and the have-nots has widened.
Kuttner provides another set of examples as to why we need to get the creditor boot off all our necks:
Economic history is filled with bouts of financial euphoria followed by painful mornings after. When nations awake saddled with debts incurred to finance wars, episodes of failed speculation, or grand projects that haven’t paid off, they have two choices. Either the creditor class prevails at the expense of everyone else, or governments find ways to reduce the debt burden so that the productive power of the economy can recover…
The creditor class views anything less than full debt repayment as the collapse of
economic civilization. In fact, however, debts are often not paid in full….Bankruptcy ingeniously
provides orderly relief from past debt so that the productive enterprise is not needlessly destroyed….But the same business elite looks askance when others—homeowners,
small nations, the entire economic system—seek relief from punishing and economically
History’s two great negative and positive examples of how to deal with unsustainable debt are the periods after the two world wars. At the 1919 Versailles peace conference, the creditor mentality prevailed, and Europe’s postwar recovery was aborted. Britain and France imagined they could bleed defeated Germany to pay off their own immense war debts (mostly to the United States). Britain also pursued tight money to keep its own currency valued at prewar levels, in order to protect the creditor class.
The policy wrecked the German economy and kept British unemployment above 10 percent for two decades. The great critic of Britain’s folly was John Maynard Keynes, then an adviser to the British Treasury. Keynes’ 1919 book, The Economic Consequences of the Peace, prophetically warned that the policy of squeezing Germany until “the pips squeak” would cause depression and a second war. After World War II, history history gave Keynes a chance do it right. His Bretton Woods
system emphasized domestic recovery in the defeated as well as the victorious powers and created a global monetary system in which private financial speculators were denied the power to compel nations to pursue deflation.
Today, that expansionary logic has been reversed and creditors are once again hegemonic. Banks want cheap money for themselves, draconian terms for others. The banker-afflicted European Union is punishing Greece rather than finding a way to let it grow. In the United States, relief is denied to underwater homeowners because debt contracts are sacred, even as the policy prolongs the agony. Everywhere, budget austerity is advertised as the road to growth— though it denies the economy its productive potential.
Just as Lenin said capitalists would sell him the rope with which he would hang them, so too do ordinary people seem to be putting their necks in the banking class debt noose by siding with the rentier austerity logic. Until they decided to loot entire economies, the first thing that would cross a lender’s mind when his borrower got in trouble is whether he was worth more dead or alive. Normally, the answer is “alive” and restructurings and reschedulings were the norm. Now we are told, falsely, that it is a moral duty to pay every debt in full, when these are commercial transactions. Non-payment has bad consequences for the borrower, so unless they were scamsters, they don’t do it frivolously. But as Kuttner points out, the perverted logic of grinding down borrowers takes the entire economy down with it. It’s ultimately a lose-lose, but having secured political control, it’s going to prove hard to save them and us from their self-destructive behavior.