The last of my three kids went back to school this morning and so life returns to (more or less) weekday normal. It was something of an unexpected bonus to have them around for eight weeks – for at least two of them it was probably slightly net positive educationally – but it is also nice to have the house to myself again during the day. So to mark the moment, it might be a day for a post with not very much to do with the coronavirus economic issues.
A few weeks ago I did a post on the notion of a “debt jubilee”. It was sparked by a column from the Australian economist Steve Keen calling for widespread government-funded debt forgiveness as part of the response to the coronavirus slump, and in preparation for my RNZ discussion with Keen (although that debate never got onto that specific). What he was proposing seemed likely to dissolve into hyperinflation (and although I don’t suppose he believes that, I’ve not seen any clear articulation as to why/how). I ended that post this way
When I think of debt writeoffs, I think of explicitly recognising that someone has to bear those costs – on any very substantial scale there are few/no free lunches. Banks will have to write off some debt – perhaps quite a lot – over the next few years, and their shareholders will bear that cost. That is the business they went into. Writing off mortgage debt more generally on the sort of scale Keen seems to envisage can only be done by imposing fearsome losses on others. It is so utterly different from that Old Testament conception (which, in effect, limited the scale of liabilities anyone could run up in the first place).
I have some sympathy with the view that requiring young – and now not so young – people to take on multiple hundreds of thousands of dollars of debt to get into a basic house in our cities is pretty unconscionable and deeply unjust. But, frankly, that isn’t fault of the banks but of the central and governments that make land – a resource we have in abundance – artificially scarce. In fact, I’ve even gone so far as to argue that if ever we managed a government with the courage to fix the land market, it might be both opportune (building coalitions) and just to offer some compensation to the losers – those more or less compelled to take on very high debt in recent years just to get a foot on the ladder. But there would be an explicit, shared, cost to that.
And more generally I’m not persuaded that current debt levels – public, private or total – in New Zealand pose any vast threat of economic or financial collapse. Keen likes to highlight how much debt has risen since, say, 1990, but it isn’t obvious why that is the most relevant benchmark. In a speech I wrote with Alan Bollard a few years ago, I included a chart showing that mortgage debt (house and farm) was materially lower then as a per cent of GDP than it had been in 1920s New Zealand, I rechecked the numbers this morning and the picture today is the same as it was in 2011. Contrary to Keen, our banking system looks pretty robust, not ricketty.
I also take the view that there is plenty that can and should be done to assist individuals and firms through the next few months. There is a strong case for income support (broadly defined) or even income insurance (of the sort I’ve championed here) but that is very different proposition than somehow looking to wipe out debt without identifying whose claims to real resources will be wiped out to pay the economic cost of that (as distinct from the “which account to write the cheque on” issue that Keen deals with).
Anyway, a commenter on that post mentioned a recent book on the jubilee issue and in so doing reminded me that I had bought Michael Hudson’s ...and forgive them their debts a while ago, so I dug it out and read it. The subtitle is “Lending, Foreclosure and Redemption From Bronze Age Finance to the Jubilee Year”. Hudson is/was an economist and economic historian who has devoted much of his effort in the last couple of decades to making the case for different approaches to money and banking. His book has blurbs from a fairly predictable range of left-wing writers in the area (Graeber, Pettifor, and Keen himself) but was also selected as one of the economics books of the year by the Financial Times, and the book has drawn praise from the FT’s chief economics columnist Martin Wolf
The American economist Michael Hudson has written a fascinating book, . . . and forgive them their debts: Lending, Foreclosure and Redemption From Bronze Age Finance to the Jubilee Year on the historical antecedents of the Mosaic debt jubilee. The work of Assyriologists has shown that by the third millennium BC, the rulers of the ancient Near East understood the necessity of repeated debt forgiveness. The alternative was, he writes, “economic polarisation, bondage and collapse”. The relevance of this history to the world of today seems clear: debt is necessary; too much debt is disastrous.
Set aside the final sentence for now and I’d largely agree. It is a fascinating book, although I would recommend it only guardedly: read it and you will learn a great great deal more detail about ancient Mesopotamia – and not a little about debt, property etc, in late first millennium Byzantium – than you probably ever wanted to know. My tastes are fairly geeky, and I have quite a large collection of books on all sorts of dimensions of Byzantium, but to be strictly honest I could probably have done with a 70 page version rather than the 300 page one.
The core of the book is about the debt forgiveness practiced by kings in ancient Mesopotamia, where (typically) the debts owed by the peasantry were, it appears fairly conclusively, remitted each time a new king came to the throne. This wasn’t typically commercial debt – which was not covered by the debt remission – but that of peasants in an economy with little or no productivity growth and very high effective interest rates. The borrowers hadn’t borrowed to increase the commercial potential of their land, but had fallen into debt often as result of crop failures. Often the debt was tax debt itself – in other words owed directly to the central state. And why did kings decide to remit debts – not just once, but numerous times over the centuries? The essence of it seems to have been to maintain a free landholding peasantry, available for military service (the alternative for many being flight). What, after all, was the alternative in what was, for most, a near-subsistence economy? It was path that would have led to landlessness and enslavement. It wasn’t just money debts that were remitted. Hudson records that by Babylonian times, the jubilee release also encompassed the return of those who’d become indentured servants in response to debt, and the restoration of cropping rights that debtors had pledged to creditors.
Here a couple of short excerpts from Hudson
“The common policy denominator spanning Bronze Age Mesopotamia and the Byzantine Empire in the 9th and 10th centuries was the conflict between rulers acting to restore land to smallholders so as to maintain royal tax revenue and a land-tenured military force, and powerful families seeking to deny its usufruct to the palace. Rulers sought to check the power of wealthy creditors, military leaders or local administrators from concentrating land in their own hands and taking the crop surplus for themselves at the expense of the tax collector.
‘By clearing the slate of personal agrarian debts that had built up during the crop year, these royal proclamations preserved a land-tenured citizenry free from bondage.
‘Babylonian scribes were taught the basiv mathematical principle of compound interest, whereby the volume of debt increases exponentially, much faster than the rural economy’s ability to pay. That is the basic dynamic of debt: to accrue and intrude increasingly into the economy, absorbing surplus and transferring land and even the personal liberty of debtors to creditors. Debt jubilees were designed to make such losses of liberty only temporary.
As I noted in the earlier post, very similar ideas and prescriptions are found in the Old Testament.
In the Western tradition, the idea of the year of jubilee comes to us from the Old Testament. The idea was to avoid permanent alienation of people from their ancestral land – in effect, land transfers were term-limited leases, and if by recklessness or bad luck or whatever people lost their land it was for no more than fifty years. In the fiftieth year – the Year of Jubilee – all would be restored: land to the original owners and hired workers could return to their land. It wasn’t a recipe for absolute equality – the income earned wasn’t returned etc – but about secure long-term economic and social foundations.
Hudson’s book is partly about filling out the antecedents for the Old Testament model, but also for addressing directly the idea that idealistic as the Levitical provisions may have been there wasn’t much evidence they had ever been applied in practice in ancient Israel. As Hudson demonstrates, they clearly were applied in practice – in the essence – elsewhere in the ancient world.
Hudson’s argument – and I hope I am not unfairly caricaturing him here – is that what was good for the ancient world is directly applicable today: that escalating debt poses much the same sort of threat now that it did in Mesopotamia, and that in one form or another debt-write-offs are inevitable. In fact, here is a line from his introduction
“In all epochs a basic maxim applies: Debts that can’t be paid, won’t be paid. What is at issue is just how they won’t be paid. If they are not written down, they will become a lever for creditors to pry away property and income from debtors – in practice from the economy and community at large.”
And this is where I really part company from Hudson.
Again as I noted in the earlier post, as a Christian the vision of the year of jubilee has a certain appeal. But what is less clear how it might be relevant today – a point I recall debating with a discussant on the first paper I ever wrote on Christianity and economic issues. In passing, I’d note how curious it seems just at present to be worrying about the effects of compound interest as even nominal interest rates head rapidly towards zero, even for quite long-terms.
More generally, as I noted
For many – for me – it has an appeal, although one could argue that in many respects modern society already reflects some of the vision underlying the original near-eastern ideas: after all, we prohibit slavery, we allow personal bankruptcy (and discharge from bankruptcy without paying all the original debts), we provide education free at the point of use, and a welfare system for those who might otherwise fall through the cracks.
To which one could add, “and we generally have an economic environment in which people live at above subsistence, in an economy that (generally) has positive productivity growth and positive real income growth. Economists, for example, debate the long-term relationship between the real rate of interest and the real rate of productivity growth, but if there are gaps between the two they are nothing as compared to those between, say, the 30 or 40 per cent interest rate of the Bronze Age and barely any productivity or real income growth at all.
If we value a participatory democracy in which all are able to feel that they have a part in the economic fortunes of the community more generally (and, to be clear, I do) it isn’t obvious that debt or debt remission is a key element. And, of course – and quite contrary to the Mesopotomian situation – most debt is now not owed to the Crown (hardly any in fact) and it is much more common for the Crown to owe us, even the relatively less well-off among us, through such mechanisms as Kiwisaver accounts.
Keen, for example, emphasises the high level of housing debt in countries like New Zealand and Australia. But it is mostly a symptom not of hard-hearted banks but of governments (central and local) that keep on rendering urban land artificially scarce, and then – in effect – compelling the young to borrow heavily from, in effect, the old to get on the ladder of home ownership. I count that deeply unconscionable and unjust. But the primary solution isn’t debt forgiveness – never clear who is going to pay for this – but fixing the problem at source, freeing up land use law. The domestic-oriented elites of our society might not like it – any more than their peers in ancient Mesopotomia were too keen on the remission – but that is the source of the problem. Fix that and then there might be a case for some sort of compensation scheme for those who had got so highly-indebted, but at present – distorted market and all – the highly indebted mostly have an asset still worth materially more (a very different situation from a near-subsistence peasant borrowing in the face of extreme crop failure).
Is personal debt – not secured by mortgage – a different issue? Quite possibly, but it is also not the large scale problem that Hudson, Keen etc highlight. At an individual level I think the case for interest-free lending to people in real need, and perhaps forgiveness of the debt later, is quite strong. But in a society like ours, it seems like a peripheral issue. One might debate the appropriate generosity of the welfare systems, but ours is designed so that people don’t get heavily into debt just to feed their families. And we rightly do not allow debt bondage, let alone slavery.
So, fascinating as the book was, I came away thinking it of largely antiquarian interest, with some value to Jews and Christians in shedding light on the Old Testament texts. Obviously other read it and view it differently. I suspect the call last week from Bernie Sanders and a large number of mostly fairly far-left politicians (including our own Golriz Ghahraman) for the remission of the debt owed by developing countries to the World Bank and IMF can be read in that light.
Having got to the end of the post, I realised I hadn’t mentioned moral hazard – the way borrowers would respond if they thought there was a credible prospect of a write-off – and, in turn, how lenders would respond to that. It probably wasn’t that much of an issue back in Bronze Age Mesopotomia where, as Hudson notes, debts mostly arose from things like crop failure. It is, or would be, these days where credit can be, and is, used to support all sort of lifestyle options – and borrowers might be even more keen to finance a new car or overseas holiday as well if they thought they realistically might never have to pay back the cost, with few or no adverse consequences from failing to do so.
22 thoughts on “Debt jubilees revisited”
In response to Robertson’s sprinkling green among the populace it reminds us that the upper echelon are dependent on the lower echelons.
Today the “Lord of the Manor” acknowledges that he/she needs his serfs to survive in order to till his lands and so keep paying their tithes without which he/she will not enjoy the benefits to which they are accustomed
When mass redundancies occur bank stability is at risk. When a company like Fletcher makes 1000 employees redundant. The threat to Bank stability becomes a very real prospect. We are entering a dangerous period with bank stability. We can only assume there are now 1000 bank loans that now are being reclassified as sub prime.
This is not about Mon Pol or negative interest rates. This is now about bank solvency and liquidity.
Which is one of the reasons why we need a big demand stimulus which monetary policy is best placed now to provide.
Demand is severely restricted even under Level 2. The 2 metre spacing just puts off buying activities. I have been walking around town to try and spend but the queue just puts me off. So far all I have been able to spend on is lunch time sushi sandwich. Usually after lunch I would wander around the shops to buy something but the queue to get into a half empty shop is just really annoying. You shop because it is a form of endomorphic release which makes shopping fun and a form of exercise. But if you are queueing it is annoyance rather than fun why bother?
Yes, I had a similar experience in central Wgtn the other day and won’t be rushing back. But I’m assuming we will be out of “level 2” in a few more weeks and then more demand will become effective. Mon policy stimulus takes time to work anyway, so we shld have it in place now.
Michael, you are a net saver dependent on higher TD rates. You have a Superannuation fund with also 40% at least invested in savings. You don’t carry debt. How are you going to go out on a spending spree? For me I am very much debt driven which I am benefitting already from falling interest rates. But one group benefits, the other savers group does not. Will my increased spending offset your lower spending? Not likely as NZ household debt almost equal NZ household savings. Numerically there are more savers than borrowers. Therefore less demand rather than more demand the further interest rates fall.
You mischaracterise my position, but in general yes there are winners and losers. Nonetheless, over the economy as a whole, lower interest rates tend to bring forward both consumption and investment spending and, by lowering the exch rate, also attract net demand towards NZ producers. In principle it is no different than when the OCR was cut from 8% to 3%. My argument is that this time – being a more severe recession – the OCR should be cut from 1% to, perhaps -5% (or even lower). The sooner it is done, the deeper the cut, the sooner things get back towards something like full employment and (in principle) to higher rates again.
The OCR never should have got to 8% at all in the first place. It severely damaged consumption demand for both savers and borrowers because at those levels entire industries dependent on debt with hundreds of thousands of people losing their jobs and hundreds of thoisands more fearful of losing their jobs. Mortgagee sales and bankruptcies was at record levels.
The OCR should have stopped at 6%. Then we would not have needed to drop further than to 4%.
Serfs were the poorest of the peasant class, and were a type of slave. Lords owned the serfs who lived on their lands. In exchange for a place to live, serfs worked the land to grow crops for themselves and their lord. In addition, serfs were expected to work the farms for the lord and pay rent
Good Scrabble word: enfief – to give a fief
Do read my latest article to understand China and current happenings:
[…] Michael has returned to the topic here focussing on a book by Michael Hudson titled “… and forgive them their debts: Lending, Foreclosure and Redemption from the Bronze Age Finance to the Jubilee Year” and a call by Steve Keen calling for widespread government funded debt forgiveness as part of the response to the COVID 19 recession. Michael is not a fan of the idea and I think sets out a quite good summary of the case against a modern debt jubilee. […]
Interesting. Also tend to think the debt mix matters – capital market debt seems easier to write down / reset (assuming the creditor funded with equity) relative to bank based credit systems which often have sector concentrations: attempting to reduce bank debt as a collective via repayment through income or asset sales pretty soon renders the system defunct.
Could you advise please,
Can debt be ameliorated or increased by banking procedures such as derivatives, where debt is changed into financial assets.
In the 1800s US farmers were distressed how the purchasing power of their harvests was reduced and manipulated by banking systems of the day.
In fact it spawned bank robbers ( eg James Bros ) who were generally supported by the poor farmers.
Derivatives are not financial assets. They are essentially back to back contracts eg interest rate swaps or currency swaps.
You might be talking about the options market where a financial trader can buy harvests from farmers for a fluctuating market price with only a fraction of the settlement amount and if the price rises you can onsell to another buyer without having to take delivery of the harvests or having to pay up in full. However if prices were to fall because the season was bountiful and supply exceeded the demand then sellers have to keep dropping the price as there are no buyers.
Sorry not to have responded to this, altho i see someone else did. In many ways, the bigger issue in the US 19th was concern about the return to the Gold Standard and the deflation the US experienced in the late 19th C which saw product prices generally trending down while the nominal value of farm debt was unchanged, so that real indebtedness was rising.
Thank you very much for your response.
Was talking about Fannie Mae and Freddie Mac really.
And could add in treatment of debt by the NZ Government when they sold off the Rural Bank with its debt.The RB sales did not help the mortgagees much.Did not damage the economy much either probably because of the relative size of the transactions
The activities of the others led to the GFC.
There have been derivatives in the past that parcelled debt and sold it as an asset.I understand some of these processes are now illegal.
The treatment of debt raised for the Covid19 crisis will be a major benchmark of success or failure of our response to this pandemic .
Rosecevans, all loans to borrowers are assets on a Banks books.
The GFC problems with Fanmie Mae and Freddie Mac is about subprime loans packaged and held as security for on lending to banks all around the world. Prime loans are loans to borrowers with good jobs and paying the interest on those loans regularly and on time each and every month.
Sub prime loans are borrowers whose jobs are uncertain and loan payments are irregular and uncertain. When house prices were rising, banks could revalue and interest payments or loan payments can be deferred by increasing the loan. The problem with the GFC is that once borrowers stop payments because of no jobs and banks have no increased house prices to increase loan amounts then there is a domino effect with all banks around the world that have used theses packaged sub prime loans as security to borrow.
Thank you both for your responses
Michael, negative Interest rates are a fabulous idea, but don’t concern yourself with the moral hazard created when dumping the problem on a saver! I’ve worked for my money – not speculated in property or shares. I agree, there’s got to be a loser, but I just don’t see why it should be me!
No, I prefer the Modern debt Jubilee!!
[…] by the American sociologist David Graeber called Debt: The First 5000 Years. and I’ve written here about debt jubilees from thousands of years ago But that innovation, and evolution, had completely […]