The Case For Wiping Out American Debt
One thing I learned in electoral politics is that "80% issues" are very powerful forces. If such an issue gets in play, it can massively change political landscapes, and being on the wrong side can be fatal to political careers.
Rasmussen is reporting that 80 percent think the financial bailouts benefited Wall Street, not average taxpayers, which means most of the DC establishment is on the wrong side of an 80% issue. Anti-bailout politics have yet to gel into any great force, but I suggest there's time. The slowing economy has some Democratic reelect numbers plunging across the country: Dodd's are at 39 percent, Corzine at 37 percent, and tongue firmly in cheek, Democratic incumbent Arlen Specter is doing best at 45 percent. These are pretty terrible reelect numbers. Democrats have to begin asking themselves, "What if next fall, unemployment is in the double digits and the economy as a whole is at best stagnant?"
The case for deflationary stagnation is now stronger than it ever was, and here's why. First and foremost, when a massive financial bubble pops, you get deflation. That's what happened in the '30s and that's what happened in Japan in the '90s. If you have a bubble in some small sector, say technology stocks, the economy might take the hit and coast through it, but when the bubble is widespread -- for example through every single component of the financial system -- deflation cannot be avoided. The only real cure for financial bubbles is to not let them form.
In the last few months, the global economy has slowed its rate of contraction, but it is still contracting. Japan is reporting producer price falls of 6.6 percent. Eurozone prices turned negative in June, with Germany expected to report negative price growth in July for the first time in a half-century. Unemployment is still rising; Spain is up to 18 percent. US unemployment will soon be over 10 percent, housing prices are down a third from their peak and still heading south. Finally, according to The Wall Street Journal, the banks reported in the second quarter, their lending contracted by almost 3%.
Tyler Durden over at Zero Hedge put up a nice report last night. He starts with the simple fact that the American consumer is 70 percent of the economy and then shows all consumer numbers quite impressively heading south. A couple of other statistics pointing to deflationary stagnation are state and local tax revenues dropping at their steepest in a half-century. State budgets are being cut across the country, and California isn't the only place slicing their education spending. The New York Times reports that unemployment benefits stalled across the country due to tight state budgets.
The only argument against stagnation at this point seems to be global stock and commodity markets, but let's be clear, Alan Greenspan proved for two decades the Fed can pump up the stock market, and Mr. Bernanke has done just that, and so have the Chinese for that matter. As Mr. Bernanke embarks on his reappointment campaign, it's imperative the message go out strong and clear: Mr. Bernanke cannot be reappointed, nor Mr. Summers replace him. We need to begin embarking on a quite different course than the one we've been on for the past 30 years. Mr. Bernanke is out of bullets. In 1935, Fed Chair Marriner Eccles didn't call the effectiveness of monetary policy in a deflationary period "pushing on a string" for nothing. Indeed, the Fed balance book might not be as inflationary as it appears. We don't know what's in it. It may well be worth half or even less of what Mr. Bernanke is counting. After all, the Fed is a bank right? And the main accounting rules for banks today are mark-to-pleasure aren't they? I can't more highly recommend this short video explanation by Dylan Ratigan, with Eliot Spitzer, over at MSNBC on what the Fed's done the past year.
These numbers, and our still crippled financial system, point to if not outright deflation, long-term economic stagnation. We don't know deflation well, but I'll say this: It is not simply a monetary phenomenon. Most importantly in combating deflation, it's better for the government to put a dime in a person's pocket than a dollar in a bank vault. Traditional industrial economists shout more fiscal spending, and that's okay and needed, but it won't solve the biggest problems, and the largest is America's debt culture. It's time we had a debt Jubilee.
Now, I first heard of the idea of a Jubilee a year ago, reading a piece from University of Missouri professor Michael Hudson. Then a few weeks ago, Willem Buiter of the Financial Times advocated giving a debt Jubilee some thought. Jubilee is codified in Leviticus, one of the great law books of the Jewish Torah. And of course, the Christ was the personification of Jubliee, whose birth is perceived as humanity's manumission from sin. A debt Jubilee would be a large scale manumission of debtors, or as Mr. Buiter suggests, a mass scale swap of debt for equity. There's a couple of easy things we can do such as loan modifications for underwater homeowners, writing down the principal to present market values and thus lowering monthly payments. Also, a one-time wiping away of student debt for everyone under 35 would be healthy.
America is a massively indebted society, and indebted people are not free. We need to change this. If we forgive debt, we can't let people just start building more debt. We need to free them and some of our institutions from their constraining debt load, in order that we might make the changes necessary for a sustainable future. The more we keep shackling people, institutions, and society with debt, the more we are constrained by the status quo and the past. We will make necessary change impossible. People need to be freed to allow them to create a new beginning, individually, economically, socially, and politically. We need to start thinking new about a lot of things. If the economy stays stagnant, I can guarantee there will be a lot of new thinking in DC after the next election. 80% issues are powerful things.
Roosevelt Institute Braintruster Joe Costello was communications director for Jerry Brown's 1992 presidential campaign and was a senior adviser for Howard Dean's effort in 2004.
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Student loan debt forgiveness? What a great idea! I wish I had thought of it. Oh wait. . .
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I love this idea of a debt jubilee. This will surely benefit the ordinary people and they will not turn back and give themselves a big bonus. I am all for awarding the debt jubilee for all students, perhaps a 10% or more reduction in their college debt as an example.
Evelyn Guzman
http://www
I think a lot of economists are nothing more OR less than dyed-in-the-wool B.S. artists. And, that's being nice. The way we got to where we're at is by believing our own sunshine stories, well, maybe OTHER people's sunshine stories, but suffice to say there was a fair amount of 'sunshine' involved, and, well, now it's raining, everyone's really bummed out, because the little TV people are being honest, for a change, and not smiling all the time anymore, and, and maybe it's time to just wake up. Debt Jubilee? What is that, a dessert? Actually, this country's BEEN on a 'debt jubillee' for the last 30 years, jubilantly racking up billions and billions(Sagan, where are ya when we need ya, man?) in debt, only to find, shock and awe, that eventually, ya gotta pay it BACK, which, in english, translates to living the rest of your life in hock to the eyeballs, and owing your paychecks in advance, up until you lose your job, at which point the whole business just folds up and you're on your way out of your house.
Solution? It's called, 'cut up that credit card, and slap yourself around several times, until you're quite positive that you're wide awake, then, take pencil and paper to hand, and start documenting your circumstances, and think about how to try to improve them. There is no substitute. There is no 'debt jubilee'. The keyword is: THINK.
Economists are little more than modern day witch doctors who attempt to apprehend the future through burning pigeon livers.
There is also the old joke about them:
How many economists does it take to change a light bulb?
None. They sit in the dark waiting for market forces to do all the work.
"that's what happened in Japan in the '90s"
Uh, look at recent headlines. Deflation is still happening in Japan.
What? This so-called Christian nation might have to give serious thought to the "forgive us out debts, as we forgive our debtors" line from The Lord's Prayer?
They won't stand for it. It breaks all the rules. Forgiveness is fine, so long as it's only Divinity that ever has to do it, I suppose.
Congrats, Joe, for tackling a tough situation.
Nassim Taleb has identified the DEBT crisis as the number 1 problem facing our economy, the one for which he says a solution MUST be found.
Unfortunately, Taleb has not yet met the enemy, the DEBT-money system in this country.
Did you ever hear of the DEBT-money system?
That would be the one where ALL MONEY in this country is CREATED AS A DEBT.
That's the system we live under and the one that has caused our DEBT-crisis.
We have no EQUITY-MONEY CREATION - Taleb's solution.
Whenever we create ALL money as a DEBT, repayable with TWICE the amount of INTEREST, we NEVER CREATE the interest. The system is designed so that we MUST go DEEPER IN DEBT to repay that interest. What do they call it when you borrow money to pay the interest on your loans?
You call that insolvency.
The insolvency of the DEBT-money system.
Want to fix it?
You can start by checking out what Dr. Ronnie Phillips, author of "The Chicago Plan and New Deal Banking Reform" has to say about our current situation right here.
http://www
The way to wipe out the debts that are strangling this country and its peoples is to replace the debt-servant money system of the Federal Reserve, as Milton Friedman and many others advocated back then.
THAT would be a national Jubilee I could believe in.
Right on Joebhed!
It's OUR money, and we won't have sovereignty until we get our money system back, a proper money system, not a phony one run like a Ponzi scheme by banks. The proposed American Monetary Act (based partly on the Chicago Plan, but improved and expanded) will do this (read it at http://www
Ignore all the distracting fluff out there, the American Monetary Act is the one and only real thing that will easily and painlessly end the 'crisis' and bring true prosperity for everyone - it's money-back guaranteed!
Be there or be nowhere!
Can we raise the Student Loan removal to 40 years old, please? If you do that, then I'm definitely on Board.
Luckily, my Senator is Orrin Hatch... and it's obvious how much he likes the "working man."
Now I just have to donate over $1,000,000 to be able to even talk to him. Can anyone spare a dime?
Sorry...wh
No longer falling into the "under 35" category, but still having plenty of student loan debt, I'd be up for raising the age ceiling, but why just 40? I'm sure there are more than a few 40 somethings out there with usurious student loan debt. I believe our president didn't manage to pay off his loans until he was over 40. Not sure how many loans a community worker needs to take out to get a law degree from Harvard...
I read this,... and am reminded of the closing scenes from 'Fight Club',....
Outright total debt forgiveness is probably a bit much,... but incremental debt forgiveness isn't a totally off the wall idea,....
It wouldn't hurt my feelings if my house's mortgage max were to drop to market value,... whatever that is at this stage.
But the only 'fair' way to do it (if fair is the right word) would be to do if for everybody at the same time - including (unfortunately to my mind) those that were irresponsible leading up to the mess as well as those of us who can, in the long term, potentially pay off our debts in full.
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