Debt jubilees revisited

I flagged a post by Michael Reddell (Croaking Cassandra) on the (admittedly wonky) topic of debt jubilees. This is not a general interest topic by any means but I am interested in economic history and the role of debt in the economy in particular so this caught my interest.

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.

I have copied a short extract from his post here

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 subsistence borrowing in the face of extreme crop failure).

… and you can read the whole post here.

Michael has I think some good points to make regarding the causes of escalating housing debt. One thing he does not cover is the extent to which direct bail outs and extraordinary monetary policy support has contributed to the escalating level of debt. This is a huge topic in itself but I suspect that some of the increasing debt burden can be attributed to the fact that we have chosen not to allow debts to be written down or restructured in previous crises. I think there were legitimate reasons for not imposing losses on bank debt during the GFC but the subsequent development of a “bail-in” capacity should mean that bank supervisors and the government will have a better set of choices in the next banking crisis.

Tony – From The Outside