Steve Keen Calls for a Debt Jubilee
Steve Keen, a well-known Australian professor and economist, spoke at Occupy Sydney saying that the protests all over the world show economic models have failed. He’s not the only saying this obviously. But, what does that actually mean for policy makers trying to find solutions to the Eurozone debt crisis, or trying to help the ailing US housing market and economy? Steve gives his take on an interview on the new RT show Capital Account with Lauren Lyster. In his view, debt forgiveness will be a big part of the solution.
With all respect for Steve Keen, but how can a debt forgiveness be the start for a new monetary system? There are perfect ways in our present system to deal with too much debt: bankruptcy is one of them. Why call it “forgiveness”? Stuff them! Why would I need to feel sorry for business mistakes? As a business owner (without any debt) nobody cares for my business mistakes! Steve Keens solution is far too lenient, kissing the asses of the people who do not deserve it. The problem is that we’re not letting the system do its job because of the CDS’s attached to all the debt. So be it: blow up the system, never mind the consequences.
We need to dream about a new future monetary system, not hold on to a miserable non-transparent system of cheap money that thrives on bubbles and which favours the few.
No debt forgiveness!
Steve is one of my favourite non-Austrian economists. I have tremendous respect for him.
I’m not a big fan of the debt jubilee idea either, though. For a few reasons. One is selfish: I’m not a debtor. The second is moral hazard. I’m sure it would simply lead to another debt bubble if people think it will just be forgiven once everyone else borrows enough. And it would certainly cripple the willingness to lend money. Moreover, how does one draw a line in a debt jubilee? If I borrowed money from a friend with the agreement to pay him back at the end of the month, is that also to be forgiven? If not, wouldn’t the relative size of this debt become much larger in a massive deflationary event like a jubilee? And how is that fair? I don’t see any way to fairly differentiate between what should be forgiven and what shouldn’t. If a line were just drawn in the sand arbitrarily, some would end up massively worse off than others – and I could see a social fabric disintegrating as a result.
But I do agree that inflating our way out Summers-style is impossible for the reason Steve states: private debt stocks and flows matter. Another crisis will just force the deflation that is needed.
My preferred solution:
Step 1: 2 year foreclosure/repo moratorium.
Step 2a: Force all financial institutions to comply with m2m accounting.
Step 2b: Nationalize and immediately liquidate the institutions that are then insolvent. Give priority to depositors and pension funds. Cancel as many derivative contracts as possible.
Step 3a: Repeal legal tender laws to allow for competing currencies.
Step 3b: Repeal the central bank’s interest rate manipulation abilities.
Step 4: Selectively default on sovereign debts owed to foreign institutions or individuals.
Step 5: Cut military expenditures by half.
Step 6: Means test for entitlement programs – provide an opt-out path.
The combined changes would surely result in higher interest rates which would rightfully bankrupt many debtors. But with a repo moratorium combined with lower asset prices, most debtors would be able to renegotiate their loans in whatever currency they wish (or multiple currencies to hedge risk) at a variety of rates.
Sovereign debt stocks would be dramatically reduced and state spending would be brought under control.
I fully expect a massive plunge in GDP and employment – but it would be the least productive part of the economy suffering the greatest decline. Re-education credits can be given accompanied by some large public works projects (preferably by local governments).
In the end, you would have a new monetary system that would not enable such a runaway increase in public nor private debt. And I think with market interest rates, there will be plenty of investment in long-term projects to reignite the economy within mere years with a more sustainable mix of productive industry.
To add.
The above, I believe, would target those most responsible for enabling the creation of our current problems.
1) Central bankers would be stripped of their primary tools
2) Financial institutions which have grown illegitimately on the back of implicit bailout guarantees, manipulated credit spreads, and anti-competitive regulatory behaviour would all most certainly be the first to be nationalized and liquidated. Smaller lenders that made well-calculated decisions would be the last to be taken under receivership and would have an opportunity to partake in bidding for revalued assets liquidated from others.
3) Individual and corporate depositors would be made whole. Pension funds would then be next in line. Senior bondholders get the scraps.
4) Average Joe with a mortgage would likely see the value of his home plummet, but with a moratorium on foreclosures and his financial institution insolvent, a pension fund or bondholder will be forced to firesale the loan to one of the more solvent institutions, who will in turn be able to renegotiate a loan with a lower principle profitably. Also likely are Great Depression-like labour market symptoms, but with far more advanced social welfare systems in place. Falling prices for shelter would alleviate this. Additional resources can be deployed to training for public works projects.
5) Indebted businesses would fail. Competitors would replace them relatively quickly if their good or service was a legitimate need, rather than a need ‘manufactured’ by the malincentives of low interest rates or other distortions. Productive business would benefit from the liquidation of the unproductive. The prudent will gain market share over the reckless.
6) Retired and the elderly would be hurt by falling asset prices, but helped by falling prices. Market interest rates would provide some income on what capital they have left. Promised entitlements needn’t be taken away, but they may be means tested and the value of their payment in dollars would depend on the market’s acceptance of dollars relative to whatever other currencies rise to compete with it.
7) The rich that have recklessly invested their money in the FIRE industry at below market rates will lose their money. The rich that have invested their money in productive industry and correctly anticipated market demand for their goods and services will remain wealthy – and perhaps become more wealthy.
8) The poor would notice little change. Unemployment would still be difficult for a time. But with asset prices plummeting and the reversal of the inflation tax, the “American Dream” would be closer to arm’s reach than before.
9) Legitimate entrepreneurs – that seek to benefit from making the facilitation of voluntary exchange easier and more cost effective – will benefit from the ability to craft new ways to reduce risks for their customers via the combination of fractional reserve, 100% commodity reserve, or whatever other currency rises to compete.
10) Financial wizards and the mathematical economists that provide cover for their shenanigans will be forced to duel with honest competition and to do without government guarantees. They’ll return to teaching grade 9 algebra where they belong. Actually, where they belong is jail. But I repeat myself.
There’s a lot of compromise in there from an ideological standpoint. And I think this type of a solution is the most ethically responsible way of transitioning from crisis to recovery; in fact, the only way to do it while maintaining our basic liberties and preserving some sense of a social fabric.
I like the idea of sovereigns in trouble just simply defaulting 100%, trigger a CDS wave, wipe out all the too big to fail banks. Then send in the FDIC and all the other national regulators to nationalise the remains of the banking system. This would wipe trillions of debts out in one fell swoop, and any potential tax losses as well.
Then reimpose Glass-Steagall, and the division of banking and insurance again. I would also ban any bank with access to the Fed window or FDIC backing having any overseas interests. That would end the chance of a bank trying the regulation arbitrage route again. If they ever tried to move offshore they would have to give up their entire domestic business before they could open abroad. Any offshore bank that opens in the domestic market would have to be fully protected by its national regulator. In the event of any irregularities the US would then sue the relevant national regulator for any losses plus fines incurred by the public.
My solutions.
1) Reimposing Glass-Steagall.
2) Ban banks with offshore branches being part of the Fed or access to any Fed programs.
3) Ban the buyback of shares which is primarily a scam to boost executive pay anyway. Companies could buy back shares and dissolve them only once per decade.
4) Allow bankruptcy to include student debts
5) For a period of 2 years reduce the fees for bankruptcy to $100 with filing fees of $1. This will allow those underwater to get out from all their debts much more cheaply. It will obviously force banks to take writedowns as well.
6) Force owners be they banks or landlords to be responsible for any property taxes, while empty. So an end to sheets like removing roofs to avoid property taxes. This will mean that landlords and banks will be much more reasonable to getting tenants. Even if it means letting for nothing on the condition that the property tax liability is taken on by the tenant for the duration of the tenancy. This will lower rents and even force part finished buildings to be finished because they are a tax problem for the banks or owners. This could boost construction work even if temporarily.
7) I would extend capital gains taxes all property including your main residence. Because this was exempt unlike shares it actually encouraged speculation. That was definitely the case in the UK.
8) I would also consider increasing capital gains tax to 40%. Most capital gains are as a result of leverage anyway. With capital gains being taxed to punitively the way of generating real wealth will be from making profits and paying dividends. This was how much wealth was built up over time. Also with many businesses having internal rates of returns in excess of 40% why should they not pay dividends. There could be exemptions for pensions or mutual funds while within the fund. If we had not had the property bubble we would probably have avoided the debt bubble as well.
9) End tax loopholes for companies.
10) Cap executive pay at the same level as corporation taxes paid. That way for a corporation like GE that paid zero Federal taxes the pay of the board would also be zero.
11) Cap political donations at $5000 per person via all sources, All donations must be linked to a voter social security ID. That would stop foreigners and corporations aiding financially. Any money that cannot be 100% identified with registered voters would have to be paid to paying down of the national debt. So no more contributions from PACS. This would keep politics clean financially. Lobbyists would also have to follow the same rules. IRS audits would fine any lobbyist who did not pay any excess to the national debt as well. This would reduce the financial benefits of lobbying. Any company that gets more than 19% of its revenue or profits from government spending is also disqualified from lobbying. It seems stupid that a firm that gets a government contract can use government funds to lobby for more business.
12) Nationalise any banks that fails and break it up. Its branches cannot be sold to any bank with more than 500 branches. That will keep the banks small.
13) Force any large bank to keep additional reserves at the treasury. These would not be interest bearing. This would be exponential so really large banks would have to deposit many billions. Small banks would eliminate systemic risk and increase competition.
14) Any bank that fails would mean that the entire board are disqualified from acting as directors for any company for ten years, even if just non executive directors.
15) End the Fed regulation of the economy. They do not do that anyway. They are only in interested in maintaining bank asset values. I would have a cap and collar for interest rates. If rates fell to 4% and the economy was still struggling then Congress should apply fiscal measures, same if interest rates were above 12%. Then congress would have to act fiscally to slow the economy down. This would protect savers and pensioners whose income would not fall so much., but it would send a clear warning to mortgage holders that property will not be bailed out with low rates.
16) Cap pension contributions and relief to $5 million. No reason why the super rich should be subsidised in retirement either. $5 million will provide a decent pension if interest rates are higher anyway.
I chuckle at point 7). People would just not move or sell; thus avoid the tax.
Capping exec pay failed in the 1970s in the UK. I will never happen
point 6. moves in the UK to do this.
In the eighties there were thousands of industrial properties that had the roofs ripped off to avoid such taxes. It just reduces supply and holds rents too high. End that, and you get more properties available for tenants and keeps property prices realistic.
If property kept pace with wages then you only get a bigger home as your wages increased. Leverage would be pointless as it would be taxing any potential gains.
As for capping executive pay via a global tax route it would make sure that they pay their taxes, rather than free ride. The alternative is unitary taxes.
It’s hard to feel sorry for “Ma and Pa Kettle” when they extracted several TRILLION dollars in home equity loans in just a few years’ time. If their debt was primarily 1st mortgages at 80% LTV, I would be much more sympathetic to their plight.
Besides, if “Ma and Pa Kettle” didn’t know what they were doing at the loan closing or during the mortgage process, perhaps they should’ve paid an attorney, a CPA, or a financial adviser a few hundred dollars to help them through the process and ensure their best interests were being met.
Yes but many prime borrowers were put on sub prime loans because the commissions were better. There was rampant bait and switching for borrowers. The whole process of deregulation was not to allow more people to be able to borrow but for the banks to come out with ever more complicated mortgages that guaranteed fat fees. I would like to restrict all mortgages to simple repayment mortgages, with maximum LTV of 80%.
I’ll just say this. I like some of the suggestions posted out here. But, they seem to smack a bit of the “we can still make this right with Austrian economics (or a flavor of it)” camp.
In reality, the time when we could have imposed Austrian economics and engineered a managed approach to a new Kondratieff Winter has passed.
In fact, imposing an Austrian economics solution on already weak economies at this point will do more harm than good; causing a new recession / depression or making any contraction much worse.
All currencies are now on a race to the bottom to print money, devalue, and inflate out of debt.
That is the path that we have chosen.
The Eurozone is its own beast, however. IMO, its even money if the Euro will survive at all. For obvious reasons.
And to the OP’s point. Debt forgiveness in the current climate should be a tool of last resort. Not a solution in and of itself. The last thing we need right now is yet another shock to the world credit system.
Hayek and Keynes were both talking about deflating bubbles before they started. So Keynesians and Austrians are right about that. The problem was that the establishment was dominated by neo-classical monetarists, like Greenspan who did not want to identify bubbles and denied you could even see them until they burst and then it was better to clean up afterwards. I regard myself as a Keynesian but do see the merits of an Austrian style debt clear out. Let the bubbles deflate fully. Allow unemployment benefits to take the strain till the bubbles are gone. That is why I would want permanent unemployment benefits, not temporary ones like the US has now. Then have Keynesian stimulus and none of this crappy tax cuts. Actual spending on work employing people to do things.
The problem is that anyone can ride a bubble and become a “great property investor” when they are simply riding a bubble. What is ignored is that real estate prices one way or another push up inflation. It might be higher rents or wages to employ people to work for you.
So longer term I would like to see property bubbles stamped on hard. Higher interest rates and capital gains taxes to kept property prices in line. What you end up with is appalling labour mobility. In the Uk we have rising prices in the south of the country and falling prices in the north. If companies want to transfer the business up north where property is cheaper they lose many staff who fear never being able to move back south if necessary. So the south gets more and more expensive with an every poorer quality of life.
The solution is simple. 1. Governments spend more equity into the private sector by buying up labor and other slack resources. 2. Get some common sense regulation of the financial sector and derivatives in particular.
Edward is right, if you lose, you should lose. But MMT shows this is not rocket science. All these shenanigans are exacerbating a problem with a simple solution.