Opinion

Edward Hadas

A Christmas message for lenders

By Edward Hadas
December 18, 2013

For many shoppers, Christmas is a time to rack up debts in the expression of seasonal goodwill. For policymakers, it should be the holiday of debt forgiveness.

The inspiration for that religious-sounding thought comes from the atheist philosopher Hannah Arendt. She argued that forgiveness has a central role in human affairs, and the secular world should be grateful to Christianity for the discovery. Arendt was of course talking about forgiveness in the common understanding of the term – a pardon for a wrong, the cancellation of “you owe me one”. But her understanding of this as enabling people to “begin something new” works just as well when thinking about the financial equivalent: a willing erasure of material obligations.

Consider a loan from parents to a son or daughter who wants to start a business. If the new venture fails, a tough demand for repayment is likely to spawn resentment. Debt forgiveness will breed gratitude and closer ties.

The gains of forgiveness are less psychological when the debts in question are loans from mega-banks to anonymous companies or overly ambitious homeowners, or bonds issued by cash-short governments. Still, when borrowers would be impoverished by making every effort to repay, forgiveness is ultimately the better way. Lenders should take some responsibility for their own poor judgement. Besides, strict exactions create socially divisive goodwill, while the dissolution of excessively onerous obligations gives companies and families a chance to engage in socially beneficial activities, and sets governments free to serve the governed better.

Consider also what debt forgiveness avoids. Some loans are taken out in desperation and can probably never be repaid. Others go irredeemably bad because of an unpredictable problem – a flood, war or economic downturn. If all these un-payable debts are held sacrosanct, then the number of overburdened borrowers and the sum of unpaid debts will inevitably increase.

Eventually, creditors will probably demand debtors’ prisons or involuntary servitude. Debt-slavery is mentioned in the Bible, which restricts loans and requires regular “jubilees” of general debt forgiveness.

These days, the expansion of the hard-to-repay credit leads only to a lesser but still significant misery – increased economic inequality. Debtors, including the taxpayers who must pay off government debt, become poorer while creditors, including the owners of government debt, become richer.

The banking system does already acknowledge that some debts need to be forgiven: interest rates are higher than they would be if all loans were repaid, and banks set aside additional funds to keep from defaulting on their own borrowings, from depositors. But few lenders accept defaults in the spirit of Arendt or Jesus. Rather, they smart over their losses. They are rarely impressed by the social solidarity which forgiveness creates.

The bankers’ reluctance to forgive is understandable but unhelpful. The expectation of fixed payments in a necessarily uncertain world leads to easily avoidable disappointments. Economies would run more smoothly if loan payments varied with the borrower’s circumstances.

The excessive insistence on the sanctity of loans is particularly damaging right now. The primary problem is neither oppressive creditors nor oppressed debtors, although financial power is uncomfortably concentrated and financial misery is distressingly widespread. The main issue is that there is simply too much debt. In the United States, the leader of the global trend, the ratio of debt outstanding to GDP has increased since 1975 from 160 to 346 percent.

The additional debts and interest payments are not a sign of greater economic potential. Only 16 percent of the American increase comes from the growth of business loans. Rather, the new debt reduces potential. It magnifies the effects of economic disappointments, takes cash away from investments, distorts the tax system and increases the economic clout of a dangerously self-serving financial sector.

Many policymakers recognise the problem, but if they want forgiveness at all, they are only comfortable with the small-scale and almost unintentional pardons produced by unexpected inflation. I have been arguing for something bolder since 2010.  Then I pointed out that the debt blanket, which had led to a financial crisis and massive recession, had smothered two years of normal recovery. The count is now five years, with no end in sight.

Systemic problems of this scale call for dramatic solutions. My Christmas dream is an updated form of the Biblical Jubilee – a massive multi-country debt forgiveness. It would be a political challenge, but technically, it would not be that difficult in a world of fiat money. Each government could simply print enough money to make a big deposit into every adult citizen’s bank account. The new cash would cancel out a substantial portion of the old debts.

Arendt is right: without forgiveness people are trapped in endless and futile cycles of action and reaction. The current stingy approach to debts will only prolong the economic malaise; it could even spawn social conflict between lenders and borrowers. Debt generosity now could produce the best sort of prosperity.

Comments
One comment so far | RSS Comments RSS

Helicopter quantitative easing. Certainly a step up from the the 0.1% style QE going on for the last few years.

Posted by BidnisMan | Report as abusive
 

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