The Case For Wiping Out American Debt

09/06/2009 05:12 am ET | Updated May 25, 2011

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.