Since A Debt Bubble Is The Problem Why Not Simply Halve All Debt -- Hold A Jubilee (please discuss)

[althecat]

From: http://www.scoop.co.nz/stories/HL0903/S00165.htm

Jubilee - Halve The Debt!

By C.D. Sludge

In this edition:
1 - Jubilee
2 - The Debt Bubble
3 - The Beauty Of Simplicity - Lets Just Halve The Debt
4 - What The Bursting Of A Debt Bubble Means
5 - So Why Not Just Halve The Debt? The Paradox Of Money Supply
6 - How To Halve The Debt
7 - The Folly Of Picking Winners
8 - Resolving The Crisis Of Confidence
9 - The New Zealand Situation - We Don't Really Need This Solution - Yet
10 - The Global Perspective - This Would Need To Be Global
11 - And Finally… A Developing World Perspective On Jubilee

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Jubilee

In ancient Babylon the concept of Jubilee involved the regular cancellation of debt - Wikipedia explains it thus:

"The concept of the Jubilee is a special year of remission of sins and universal pardon. In the Biblical book of Leviticus, a Jubilee year is mentioned to occur every fifty years, in which slaves and prisoners would be freed, [b>debts would be forgiven and the mercies of God would be particularly manifest.

..and…

These Babylonian kings occasionally issued decrees for the cancellation of debts and/or the return of the people to the lands they had sold. Such "clean slate" decrees were intended to redress the tendency of debtors, in ancient societies, to become hopelessly in debt to their creditors, thus accumulating most of the arable land into the control of a wealthy few.

Sound at all familiar?

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The Debt Bubble

The current debt crisis is often referred to as a debt bubble. The trouble with bubbles of course being that they burst, as this one has now.

Several thousand years ago they had a solution to this - to burst the bubble regularly in a manner which was predictable. These days however we seem to think that when the bubble builds and then bursts we should just accept that it is now a time for universal suffering. Perhaps we even think that we deserve it.

With the benefit of hindsight clearly this crisis has been caused by a failure of both the system and of human behaviour. Personal greed (particularly by the property owning baby boomers) and a willingness to believe that it will always be jam today (especially in the developed world) are indeed partly to blame.

However we should also not forget that the economic system is a product of human ingenuity. We created it and we are its masters. It ought not be our master. How can something entirely of human construct be so much more destructive than the worst hurricane.

For now however we appear to be completely in its thrall.

All the kings horses and all the kings men cannot stick the banking system together again.

So far as the global crisis is concerned nothing that has been done over the past six months appears to be having any effect.

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The Beauty Of Simplicity - Lets Just Halve The Debt

The beauty of the idea of Jubilee debt cancellation is that it is very simple.

And money is also relatively simple - even if not well understood.

Money is created when it is borrowed. Money is then destroyed when it is paid back or when debt is written off.

So if we were to collectively cancel a very large amount of debt - by way of a Jubilee - we would simply destroy a lot of money a great deal faster than the current (very painful and unmanageable) process does.

Importantly we would also do so in a manner which is transparent, fair and comprehensible. These characteristics are of course the opposite of the characteristics of the current machinations of central banks and Government treasuries.

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What The Bursting Of A Debt Bubble Means

The problem we face at present with the bursting debt bubble is that the amount of debt owed to our banks now exceeds the value of the assets it has been lent against - our houses, our businesses and our countries.

And in the case of the present crisis - i.e. the bursting of a debt bubble of monumental size - a 50% debt cancellation would effectively just turn back the clock to the 1990s.

Which is not even very far.

Think about your personal situation for a minute.

Many houses and companies and countries are now worth less than 50% of what they were only a few months ago. However many of those same assets are now worth previsely what they were just 10 years ago.

Halving the debt would simply give all of these households, companies and countries a fighting chance again. It would be like turning back the clock.

Personally in the 1990s I had a mortgage of $120,000, now I have a mortgage of $260,000. While I am earning more than I was back then, I am not earning that much more and the minimum wage has barely moved.

The balance sheets of a huge number of households, companies, and countries around the world are exactly the same. Halving the debt would not actually be that big a move.

So what would be the economic effect of such a measure?

Or put another way - is there a reason that this superficially attractive solution is actually a dopey idea with no merit at all?

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So Why Not Just Halve The Debt? The Paradox Of Money Supply

In answer to this question the first thing you need to do is be wary of the language of debt.

Currently if you read the newspaper, listen to the radio, listen to politicians on the TV or read the economist everybody is telling you the same paradoxically stupid thing.

UK PM Gordon Brown tells his people that his government should not let its industry crumble - rather the Government should "borrow" to get themselves through the crisis.

In the Economist you read that several Eastern European countries are facing the need to borrow up to 20% of their GDP in order to finance their expected fiscal deficits.

Here in New Zealand Dr Alan Bollard told us only yesterday that New Zealand is an "externally financed country" and hence has to keep international bankers happy.

Of course there is an element of truth to all of this. Banking is international and for some reason we have for most of the past five decades out-sourced much of the credit creation in the world to the Americans, The Japanese, The Chinese and the Germans.

However borrowing when talked about by banks and borrowing when talked about by humans is not the same thing.

And right now when all of the major economies (and all of their banks) are also screwed the idea of "borrowing" more money from them makes not a great deal of sense.

If there is someone out there with a few $trillion to lend us all then how come nobody knows where he lives? Why haven't we asked him to bail us out already?

This is not to say that bank debt creation through lending is a bad thing. Nor that this is not what would immediately start happening again once half the debt gets cancelled. That is precisely what would happen and that is why we would do it.

However lets hope that on the way to understanding how we can halve the debt without making the sky fall on our heads we may more widely understand that it is wrong to think - as many people do - that they have borrowed the money for their overseas trip from some Chinese peasants savings scheme.

The truth is that this is not the way the money system works.

How exactly it does work is a question that everybody should be asking their bankers and not one which is worth explaining right now.

However it is worth explaining how a debt cancellation programme might work and what its effects would be.

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How To Halve The Debt

Well for starters you would concentrate on bank created debt and bank created and issued paper.

It would not be desirable to halve the debts owed by banks to their retail depositors nor to halve the debts owed to truly deposit financed institutions like credit unions and finance companies. Some special mechanism might be required for these kinds of debt - however as they are such a tiny fraction of total debt this would not be too difficult.

Superannuation fund owned commercial paper however could be halved as could all bank paper and all debts owed to banks including mortgages, personal loans and credit card balances.

Super funds might think this disastrous but on the flip side while their paper debt holdings would be halved - the likelihood of this paper turning into paper would be a great deal less. And their investments in equities - now completely illiquid and rapidly looking like vapourware - would suddenly have growth potential.

You might also think that halving bank debt would inevitably require a halving of deposits - but it would not do so.

Deposits are not equal to bank lending (hence the reference above to Chinese peasant savings). Under the fractional reserve banking system banks are allowed to lend 10 times (and often even more) what they take in in deposits.

This is why some banks in NZ are currently offering 6% on term deposits while the official cash interest rate is 3%.

Right now deposits are like gold.

And when it comes to a halving of bank debt - maintaining the value of both deposits, bank capital and bank equity is the trump card.

The reason banks are currently falling over like flies and shifting all their risk to us taxpayers is that their "debt financed lending" - i.e. the money they created and lent to the guy in the string vest in the everglades is being written off. And when it is written off bank reserve rations fall and they are prevented from lending new money. And this is precisely what they are currently doing.

This is a vicious cycle which further damages the economy, asset values and ultimately leads to further writeoffs.

However if banks and bank depositors are allowed to keep their deposits and their capital (and their shareholders equity - which is presently heading towards zero) - but have their debt halved instantaneously - then their balance sheets suddenly improve dramatically.

Suddenly the 50% drop in the value of some of the securities they have lent against is manageable. The unimaginable writeoffs that they cannot imagine have been implemented (through the halving of the debt) and they can get back into the business of lending again.

In the meantime there is suddenly no more need for us taxpayers to take both the risk and the responsibility of trying to put the smashed credit machine back together again.

Some banks may still fail. But these will only be the truly stupid ones. Healthy businesses, families and countries will be back in business.

And this leads to one of two particularly attractive aspects around the idea of halving the debt.

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The Folly Of Picking Winners

As previously mentioned the current response to the credit crisis is being driven by on the one hand central bankers, and on the other hand Government treasury departments.

These institutions are full of economically literate people who know that one of the worst possible things that can happen in a crisis like this is for them to be given the responsibility for deciding which businesses to support and which to allow to fail.

The reasons for this are well understood.

Adam Smith's invisible hand is obviously not always effective - but it is certainly better than Stalin's or Mao's or Hitler's or Kim Jong Il's, or Pharaoh's.

Central control of investment allocation and decisions carries with it moral hazards which we know from painful historical lessons that we do not want to repeat.

But how can a treasury department spending 3 trillion dollars - like the US Treasury has just done - do so in a way that does not pick winners? How can Barack Obama avoid becoming Pharaoh?

At present the institutions are trying to accomplish this by keeping themselves at arms length.

They talk about creating bad banks, about taking over ownership of banks, but of still allowing them to operate independently. They are trying their best not to take over decision making - but it is very very hard. And also very very frustrating as unsurprisingly many good bankers do not want to lend to anyone in the current situation.

But then there is avarice, greed and opportunity, and rewarding failure.

When faced with a system which effectively involves writing government cheques with lots and lots and lots of zeros on them - how can any government run system possibly stop the money being stolen.

When the US invaded Iraq organised criminals - corporate ones - stole millions from the US Treasury. What do we think is happening now when 10 times the sum of money is up for grabs.

And this aspect of the problem of bailouts has a very nasty twist in its tail.

As taxpayers we are financing a bailout architecture which is inevitably rewarding the very same financial criminals and fraudsters who made so much money as the balloon went up. Now they are making even more as it falls.

Sure some very smart people lost a bundle in all of this - but some even smarter ones are making a fortune as Rome burns. This is how humanity works.

And this is the opposite of Jubilee.

Rather than returning society close to some equilibrium - even more power and wealth is being concentrated into an even smaller number of individuals.

By contrast simply halving the debt as a global response to the crisis would simply eliminate all of the above problem. No real decisions need be made except to proceed. What then happens happens.

Some individuals, businesses, banks and countries would still be too indebted after having their debt halved to survive.

The market would be allowed to go back to doing what it does best, finding the places where resources ought to be invested.

Meanwhile the central bankers and treasurers would get back to what they really need to do after this crisis - establish a new order in banking which prevents the catastrophic misallocation of resources which has occurred over the past decade.

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Resolving The Crisis Of Confidence

The second arm to the current crisis, the first being the broken banking system, is a crisis in business and consumer confidence.

Unsurprisingly everyone the world over is feeling like shit. Even if people understand what is going on they see no way out.

How many people really believe that the bankers, politicians and economics boffins know a way out of this crisis? Do you?

Faced with these conditions everybody is choosing to dig in, hunker down. We are all saving our pennies. Putting off the TV, car, fridge, holiday purchase and instead planting vege gardens and scooters.

Now some of this stuff is good - and hopefully we will keep doing it after things improve.

But some of it is not so good - a contracting economy in which nobody is spending will die from lack of oxygen. In addition to putting off TV purchases people are not going to the dentist, not insulating their houses and eating cheap junk food.

In order for this crisis to be resolved we need to fix the banking system and also re-inject confidence into the body politics.

Given the current state of morale something big is required. Something bold. Something which people can understand and something which genuinely will get them out spending again - even if it's just on a new rotary hoe for an urban artichoke farm.

Again speaking personally I can think of nothing more confidence enhancing than having my mortgage payments and credit card bills halved.

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The New Zealand Situation - We Don't Really Need This Solution - Yet

NZ;s Reserve Bank Governor Dr Alan Bollard informed us at yesterday's economic briefing that the NZ economy is expected to only spend six quarters in recession.

Since this recession started at the beginning of 2008 - this means NZ could be growing again by June.

Which would be great. And I sincerely hope it is true.

It is true that New Zealand is not suffering this global crisis as hard as most of the rest of the world. Here in godzone we are missing three things that most of our wealthy trading partners possess 1) a manufacturing industry and 2) a financial services industry and 3) any real savings base.

Meanwhile most of our sharemarket is owned offshore so even those punishing losses have not been felt at home.

NZ basically lives off of tourism, the cow's udder and other parts of natures bounty - agricultural exports. At present the one thing which is (so far) surviving the credit crisis intact is commodity prices. NZ in-bound tourism is also holding up remarkably well - so far.

However if we in NZ believe that because everybody needs to eat then they will always want to pay good $$$ for our meat and dairy we may find ourselves mistaken.

In the end it depends how bad things get and prices of food can fall a lot further. And with a catastrophic collapse in global trade, lending and falls in asset values of an order not seen since 1929 we would be very foolish to rest on our laurels.

Ultimately NZ prosperity is dependent on global prosperity and global prosperity is not looking too rosy.

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The Global Perspective - This Would Need To Be Global

The idea of halving the debt is not a domestic policy. Clearly the banking system is now global and the solution of halving the debt is one which also - by definition - would have to be global.

It is unlikely however that a solution like this will be embraced by the global financial institutions who are controlled and run by bankers. While this idea is arguably in their interests they may not see it that way.

Rather this is a political solution and if it is to fly then it will need wide dissemination.

So get emailing your friends in foreign places. Twitter the idea. Talk about it around the canteen.

Note also that this article is not copyright and is free to be taken, rehashed, translated, misused and abused in any manner anyone likes anywhere they choose.

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And Finally… A Developing World Perspective On Jubilee

The developing world has been calling out for debt forgiveness for decades. The cry of the poor has fallen on deaf ears in the banks of the West and the North.

An obscene proportion of the world's people live on less than one US Dollar a day and that number is now climbing rapidly.

While we in the developed world fear for our jobs and watch our paychecks being cut we at least still have some hope.

Our children may not be able to get jobs, but they can go to school while we all wait for things to get better. For many of us a worst case scenario means fewer fancy electronics, no foreign holidays s and more time in the garden.

And so for us halving the debt may seem a step too far.

But inevitably in an economic crisis of the kind that is currently hitting the world - those who are most affected are those at the bottom of the heap.

Aid agencies are already talking of donations drying up. Government aid budgets are being cut or redirected towards domestic demands - and what is already a catastrophe for half of the world's population is rapidly getting worse.

And ultimately a combination of hungry starving people and climate change will have very unpleasant consequences for us all, deteriorating security, environmental degradation, plague, war.

As the crisis deepens the sense of powerlessness we have begun to feel will take a hold of what remains of our ability to determine our own destiny.

And so for the sake of the weakest among us - as well as for ourselves - we need to find a solution to this crisis, and we need to do so fast.

Anti©opyright C.D. Sludge 2009 - Post Freely - Please Credit

[midnight]

1. How interesting. I never heard of this. But I like how it sounds.

[Midlodemocrat]

2. Interesting post. I am familiar with the concept of Jubilee

but hadn't thought about it in a modern context.


Thanks for posting.

[MadHound]

3. Stupid move, it would bankrupt probably half the companies in this country,

Especially small businesses who work with such slim margins anyway.

[althecat]

5. This is how I saw it working.

I am assuming you are talking about holding companies - ones which hold debt in other companies.

If a company is a a holders of debt(bonds say) in a bunch of other companies as well as owing debt then halving both ought to net off and result in no real change to the economic position.

A company which only holds bonds but has no debt would not be bankrupted as it has no debt.

[endarkenment]

6. How exactly would that bankrupt "half the companies"?

Please explain.

[MadHound]

11. Many small businesses work on debt and credit to some extent or another

Take away that debt that is owed to them and they would go under.

[althecat]

16. The proposal is not to halve personal or tade debt - only bank debts.....

You misunderstand the proposal Madhound.

[MadHound]

38. So you would bankrupt banks and credit unions

Both the large, but especially the small ones, which are actually the good guys in this mess.

I'm glad that you are unable to implement this policy. You are only thinking about your own benefit, you have no concept the harm that this would do to our economy.

[althecat]

44. Deposit institutions would be excluded...

Deposits would not be harmed. I agree that halving deposits would be destructive. I have repeatedly made it clear that this is not what this is about. Finance companies and credit unions (which I agree are the good guys) are mentioned in the OP as institutions which would necessarilly have to be excluded from a Jubilee of this type. However as also mentioned in the OP they are such a tiny fraction of overall lending that this would not be difficult to manage.

[closeupready]

4. This won't happen because banks managed to legalize indentured servitude with bankruptcy reform, so

scratch this off your wishlist.

[althecat]

9. Change is a coming..... thats what the election was about....

[closeupready]

12. I would certainly support such change, but won't happen while the 2005 bill's sponsor is vice presid

i.e., Joe Biden. We can hope, though. :hi:

[Nicholas D Wolfwood]

7. It would have the same practical effect of printing more money

Which would devalue the dollar so heavily that we'd be paying for coffee with $100 bills.

Plus, it's not that simple. Do you realize there are people with multi-million dollar mortgages out there? And what of corporations, most of whom acquire debt to stock shelves and pay workers on the expectation that the income will be rolling in. Is that debt halved too? Halving everyone's debt would cost far more than any stimulus put forward.

And what of the debt holders? Those are assets until the debtor goes bankrupt.

It would not work.

[althecat]

8. It would have the exact opposite effect of printing more money - it would halve money supply

It would have the exact opposite effect of printing more money - it would halve money supply

People with multi-million mortgages would halve their debt and get richer just like everybody else.

And yes all debt is halved... if companies are leveraged then they benefit more. There is very little chance that this would occur in the lead up to any halving of the debt however as banks are not lending money to anyone at the moment.

Halving the debt would cost nothing. It would reduce the asset holdings of lots of pension plans but they are being annihilated at the moment anyway. At least what was left after halving would likely be solid.

By debt holders I assume you mean creditors? What of them yes they would have half as much wealth.... they are in the same position as pension funds.....

It might work.

What is being done right now is definitely not working.

[Nicholas D Wolfwood]

10. What happens when creditors stop lending for fear that any debt will be wiped out?

A major part of our current economic crisis was started for exactly that reason.

[althecat]

17. They are already doing that in the knowledge that their debt is being wiped out.

This is about restarting lending.

If you are a bank then it would mean that half of the paper bonds that you yourself had issued (borrowed from) other banks would also be cancelled. The art in such a policy would be to ensure that in the process bank balance sheets improve from where they are now - not deteriorate.

This is why there is such a lengthy discussion around how it would work.

Part of the reason we are paralysed around these issues is that we do not generally understand how the money works.

[utunga]

36. But how can you possibly hope to "improve bank balance sheets" and wipe out 50% of debt at the same?

But, how can you possibly hope to improve bank balance sheets when at any time (including now) the bulk of any banks 'assets' are debts, whilst at least a fairly signifcant chunk of their liabilities are not, strictly speaking, debts rather they are deposits.

You are right to point out that the key is in understanding how money works. Also you are right that the key is targeting 'meaningless' debt. I think a more useful operation would be to try and find classes of debt that are mostly meaningless or (in the big picture) cancel each other out between the various banks, and legislate (ie cancel) these type of instruments out of existence. That is -- try to find a way to dismantle the complex scaffolding of interlinked obligations (such as default swaps and other derivatives between banks) and thus deleverage the banking sector as a whole by canceling out the chains of debt, that currently add up to very little in 'real' terms except massive overleveraging on the balance sheet of the banks.

Its probably not as fun or as simple as the 50% debt cut, but its a complicated thing to do - 'deleverage' (ie remove debt obligations) and just no way around that. Nationalizing all the banks first, would help, though if only so the government could get a better picture of how all these obligations lie, currently.

[althecat]

41. The question is what makes up the other side of the bank balance sheet...

On the loan side we know what's going on.

How much of the other side is:
- Deposits
- Wholesale deposits
- Deposits owned by parent banks
- Bank issued paper

Etc.

The idea would be as you describe to cancel debt in a way which does improve bank balance sheets. Doing anything else would - as you and others have pointed out - be destructive.

This is about removing the "unreal" part of the debt bubble - decisively and in as simple a manner as possible.

[muriel_volestrangler]

45. So, you're really saying you wouldn't just cancel half of all bank debt

You'd look for debts that are problems. That's way different from your initial proposal.

[althecat]

46. You would cancel half of all debt with limited exceptions...

Clearly in reality you have to be a little practical about this but the intention would be to halve nearly all debt including personal bank, Company bank debt, inter-bank debt, bank paper & commerical paper. The OP is intended to begin a discussion on this subject not to be writ in stone.

[originalpckelly]

24. No, it's the other way, you'd be eliminating money from the system

Meaning that everything would cost less, and get this, the debt would still be the same amount! This is part of the downward spiral that happened in the great depression. People would pay off their debts, but doing that would actually cause the money supply to contract, making their remaining debts more expensive, because the dollars they were denominated in were more valuable.

[utunga]

32. Not a winner .. you'd only be heaping another pile of deflation on that which already exists

You'd be massively decreasing money supply.. causing increased value of money, that is further sudden 'deflation' of everything else - which is the problem we already face.

Absolutely yes, its true that wiping debts off the books and revaluing of money is what needs to be done long term, and what will eventually (when its done) cause the depression to end. But in the short term, some would say that it is the speed with which debts are *already* being wiped off the books that is causing our current pain. Wiping off huge amounts more of debt (and bankrupting the largest of the banks) would only make things worse.

You're right - wiping off debts *decreases* money supply, but that is already happening, every time another massive bank or corporate declares bankruptcy - boom a whole lot of debt disappears - and the corresponding 'assets' on the books of various lenders (ie banks) also disappears.

The banks that are left standing are unable to lend further which is what means that the (mostly already heavily 'leveraged') multinationals cannot refinance and instead must pay back their existing debts, instead of raising further money for that new factory or product line, that is what causes production to be cut and folks to be laid off, which of course flows all the way down the line to smaller and smaller companies and eventually almost nothing *in the real world* is actually being produced - that is when the *real* depression and the real world downward spiral sets in.

Overall, while I like the sentiment - I don't think its a winner.

The current approach of printing of money like its going out of style is the opposite of this plan. I don't know if it will work either, but printing money (and a massive war) is what worked 'last' time (or at least coincided with its end). Attempting to retain the value of money through austerity and staying on the gold standard is widely acknowledged to have only made things worse - by adding to the deflationary effect - in the US in the early thirties.

Perhaps we should give Obama and his Keynesians at least another year or so to see if, at least its helping.

[utunga]

35. Also, you'd end up cratering all the deposits as well

Also, yes, as volestrangler pointed out. This would crater everybodies deposits too, resulting in an almost inevitable and immediate run on the banks that no amount of FDIC insurance could stop. Thus almost all deposits, as well as half the debts would get wiped out.

Maybe in 300 BC it was OK to do this because debts were debts and money was money. Now that money *is* debt, wiping out debts will also as night follows day, wipe out people's deposits.

[althecat]

43. The OP makes it clear that deposits would be protected - real deposits that is

The truth is that only a tiny fraction of what we call bank deposits are real bank deposits. The rest is a vast sea of toxic debt sludge which is owned by god knows who.

Real deposits would have to be preserved. That is the whole idea. That is how bank balance sheets would be improved.

As you have indicated the precise details of how bank balance sheets are structured would be necessary to understand how this would work.

Suffice to say however that at the outset you would make it clear that bank deposits would survive and if anything have their value increased by the Jubilee - not undermined.

[utunga]

49. how can you "make it clear that bank deposits would survive" if you are canceling half their assets?

Hey Al,

Interesting discussion. I guess the real question is what "fraction of what we call bank deposits are real bank deposits".

You wrote that this was "only a tiny fraction" and I think you are right that this is the key point

In an effort to understand this, I found this guide to understanding a banks balance sheets:

Understanding the asset side:
http://www.fool.com/investing/general/2007/01/05/understanding-a-banks-balance-sheet.aspx

Understanding the liability side:
http://www.fool.com/investing/dividends-income/2007/01/08/understanding-a-banks-liabilities.aspx

Relevant quote:
"If we take a look at the sources of funds footnote for Commerce Bancorp (NYSE: CBH) and PNC Financial (NYSE: PNC), we can see that the majority of their liabilities are from deposits. For Commerce Bancorp, out of its $40 billion funding base as of the latest quarter, 88% was from deposits".

88% is not exactly a 'tiny fraction' but admittedly that is a 'traditional' bank. A more 'complex' bank like CitiGroup has a different type of balance sheet.

Well, I'm no economist, but I took a look at what I could find out about Citigroups balance sheet (which is published at the SEC site) and from what I could make out, it looks like about half (between 40% and 50%) of 'what we call bank deposits' for CitiGroup are 'real bank deposits' - that is, as of their last filing, 4Q08.

By "what we call bank deposits" I assume we mean the 'ilabilities' side of their balance sheet and by 'real bank deposits' I took this to mean the line for "US Deposits" added to "Int'l Deposits". To be honest I'm not sure what things like "Repo/US paper"" actually are, but even if we assume that 100% of these things are 'loans' or "a vast sea of toxic debt sludge" (which is a bit of a stretch ;-) we'd still be in a position that..

*Halving the debt would cause all banks to fail and deposits to be worthless.*

Worse still, we put the big banks like CitiGroup who helped to create all this vast sea of toxic debt in a much better position (relatively speaking) than the smaller, local, banks that have been running a more traditional 'loans on one side, deposits on the other side' balance sheet. That is kinda unfair, though I suppose different degrees of bankrupt is also kind of irrelevant.

Furthermore, all of the above assumes that depositors would leave their money in the bank - but if you legislate something like this - which *even if everybody else leaves their money in the bank* still causes some deposits to be worthless - well, of course, everyone's going to want their money out.

So, in actual reality, the almost immediate effect of the proposed legislation would be a run on all the banks, because even if everybody else is restrained you are still in a situation where you have to take your money out asap - and of course once that everybody else is likely to be far from restrained, rather they would panic. And once, a run on the bank starts, all bets are off, FDIC or no FDIC, almost all deposits are worthless in a real run on the banks, and it is simply impossible for the FDIC to insure that much money?


The take home lesson of all this is that you can't just legislate that "Real deposits would have to be preserved." because if you cancel debts at banks you would be canceling very real peoples very real deposits also.

I don't like the system any more than you do but unless you change the rules of the game, completely that's how things would play out if the only thing you did was cancel half the debt.

--

Or is it? Maybe the only way this works is if the Fed prints a huge ton of money to back up the FDIC and then uses it to prop up the deposits part of the balance sheet. Maybe that would work. Not entirely sure but it would certainly cause a massive shift in relative wealth - in particular a massive cancelation of assets that are debts and then massive re-allocation of those assets to folks who have 'their money in the bank'. All the 401K funds and such, anything to do with wall street or banks, or capitalization would be wiped out, but folks with money in the bank in 'traditional' cash form woudl have that money printed for them by the government. Hmm

[althecat]

42. The devil is - as they say - in the detail

In this and your other posts you explicitly acknowledge that what is suggested is what ought to happen. The question is how do you make it happen in such a way which maximises:

- transparency
- fairness
- improvement of household, bank and company balance sheets

Usually decreasing money supply has a deflationary effect. However what this would do would be to decrease money supply in a way that matched the asset deflation which has and is taking place already. It is the mismatch between asset value and debt which is the problem at present i.e. the bubble which has burst.

As for your final point - there is no evidence that printing money is having a positive effect at all. Meanwhile I think we can be confident that it is.

a) enabling massive financial fraud, and
b) leading to a complete misalloocation of scarse capital resources. Money is being advanced to the people with the greatest political and economic connections not to the areas of the real economy with the most potential to get us out of this hole.

A Jubilee style solution - admittedly more sophisticated than that outlined in the OP - is simply a better solution.

[serrano2008]

13. Cool, halve my debt so I have twice as much of nothing to buy more shit with.

Is the debt the problem or people's spending habits the problem?

"Personally in the 1990s I had a mortgage of $120,000, now I have a mortgage of $260,000. While I am earning more than I was back then, I am not earning that much more and the minimum wage has barely moved."

If you weren't earning that much more then it sounds like you bought too much house for your income level. How bout this, why don't YOU halve your debt by selling your $260,000 house and buying something more affordable.

[althecat]

20. There is some truth to that - however the credit explosion was only partly...

... driven by consumer behaviour. Banks pushed debt on consumers both as mortgages and as credit card debt.

[ljm2002]

14. Good to see someone who has thought it through...

...trying to see how a jubilee could work in the present situation.

For all of the naysayers, how about trying to put on your creative thinking caps and think about what could work, rather than why this couldn't work?

The fact is, any jubilee-type solution will irritate those who think everything in life should be "by the book", because it casts away the shackles that bind.

No, we could not have a jubilee every year, because then the financial system would not be predictable. But in a crisis such as the one we have right now, 90 years since the Great Depression, it seems that we need to be looking at ways to cut through the Gordian knot. If we persist in letting the world's bankers set the rules, then really, do we expect anything to change?

Also: the developing world has indeed been asking for years for debt forgiveness. This is not a novel concept, the term has been around forever, and it happens under many different circumstances. Remember, many developing nations have been hurt by financial regimes imposed by the IMF, where, when they had to borrow money, they were told that their governments could not then spend any money on the welfare of their citizens but must "tighten their belts" and "open their markets" -- in other words, no social spending, and no protecting of their own industries or food production. Yet historically, the developed nations engaged in exactly such protectionist practices on their way up the ladder... so we are actively punishing the poorest of the poor in order to have their markets and labor to export.

We all know the global financial system is going through a reset. The only real question is how that will occur, and what are the consequences and to whom. Jubilee as laid out in this article offers one vision of how that could work. Obviously there would be details to be worked out, and obviously it could never be 100% equitable. What I'd like to know is, are there any better ideas out there?

[althecat]

18. Cheers ljm....

That was precisely the point I was trying to make.

What we are doing is not working. Jubilee is a tried and true solution and is worth a good look at at the very least.

[utunga]

33. sure - good to be thinking of ideas - but...

... you say "Jubilee is a tried and true solution".. references required. What are you referring to?

[althecat]

40. Tried by the Babylonians... and israelites... not sure if it was used much..

In early christian times but probably. There are references in the wikipedia article.

[autorank]

15. k*r Let's halve it all

Mortgages, etc.

Excellent. Time for solutions.

[althecat]

19. Hi Michael.

Pleased you like it.

[autorank]

29. Get it all on the table

It's time to fix this, not sit around and do nothing.

The alternative is the "rump" caucus in the Senate consisting of closed minds and frightened
functionaries - led by Evan Bayh. What a joke. They ought to be called the Ostrich Coalition.

Halve the debt is the tyipe of reset that could get things going.

Time for truth.

[burythehatchet]

21. I look forward to reading this more closely, but I do believe that

it is no longer a crisis of confidence. For the first time in my lifetime I see it is as a crisis of trust, a far more intractable problem as trust, once lost, is very difficult to regain.

[althecat]

22. This is also true... trust takes time to build - and we have no time.

The beauty of this solution is that it enables us to regain control of our lives and gives us time to build a new financial system that we can trust. At present we are just being eaten alive by it.... which explains the absence of trust. Its perfectly rational.

[originalpckelly]

23. Because that thar money supply will collapse causing an even greater problem?

[unblock]

25. you can't do this explicitly -- too much obvious moral hazard and unfairness. BUT ....

you can inflate your way out of the problem. simply overstimulating enough to create hefty inflation will make fixed debt small in inflated dollars. do this until debt is halved, then jack up interest rates to kill the inflation.

of course, people will get whiplash from jerking the economy around like that, lose all faith in the fed and in the powers that be, but heck, it would achieve the stated goal.


the better way, of course, is to get the economy actually moving, so people can build up their asset side and use that to manage their debts. this is best done by properly and prudently stimulating the economy, such that any inflation remains reasonable with the expansion of the economy. the key, of course, is to spend the government money in a way the maximizes cashflow through the economy, which mostly means giving jobs and money to poor people likely to spend it quickly.

but that's even less likely to happen, we hate poor people in this country.

[BrightKnight]

26. ALL private capital would dry up and the economy would crater.

Don't expect me to pay for any more of your bad debt with my retirement account.

If you don't like credit don't use it.

[EVDebs]

27. Worldwide derivative debt is $1.14 QUADRILLION USD

Yes you heard right, $1.14 quadrillion US dollars. This is a figure from Steve Pizzo's article
Follow The Numbers

http://www.newsforreal.com/

The combined world figure for total derivatives is $1.14 QUADRILLION : ""Here’s the breakdown, according to the International Bank of Settlements,

http://www.bis.org/statistics/derstats.htm

which acts as banker for the world’s central banks: 1) Listed credit derivatives stood at USD 548 trillion; 2. The Over-The-Counter (OTC) derivatives stood in notional or face value at USD 596 trillion and included:

a. Interest Rate Derivatives at about USD 393+ trillion;
b Credit Default Swaps at about USD 58+ trillion;
c. Foreign Exchange Derivatives at about USD 56+ trillion;
d. Commodity Derivatives at about USD 9 trillion;
e. Equity Linked Derivatives at about USD 8. 5 trillion; and
f. Unallocated Derivatives at about USD 71+ trillion. ""

So, the banking and financial world knows this already. And Wall St/Fleet St./Bahnhofstrasse (Zurich) all know too, that's why their stock markets tumble after every announced "bail out"...they know it will never be enough; the bankers just want to be the last guys out of the room before the taxpayers are stuck turning off the lights.

President Obama should be trying to get the world to agree to write off all this derivative speculation !!!!! It's what is 'crowding out' legitimate dollars that should be going to a recovery.

[autorank]

30. Debs, great information on derivatives. $1.4 Quadrilion - wow!!!

Here's a solution from something I wrote 'back in the day' - this day

http://www.scoop.co.nz/stories/HL0809/S00274.htm

The perpetrators can position all day long, taking advantage of the citizens through a quiescent White House, Congress, and judiciary.

But the truth will emerge - the country is broke and not because we don't work hard enough, make good products, and provide quality services. We're broke because the greediest people in the world couldn't contain their greed and there was nobody watching them who wasn't benefiting. Now the watchers are desperately trying to make it all go away.

There needs to be an accounting and a correction - and not by the usual suspects.

Here's one way to start with derivatives crisis in major institutions:

"If all the top 25 financial institutions were put into receivership, and (big if) if they all could be liquidated under an agreed legal framework, many of these risky contracts could be allowed to offset each other, and much of the risk eliminated." http://agonist.org/diary/numerian">Private correspondence, Numerian, The Agonist, Sept. 21, 2008

[EVDebs]

31. Thanks, autorank !

I hold your opinions in the highest regard. Thanks for the link. If only we can get the Obama people to 'write off' this speculative debtload of derivatives it would free up what is now 'crowding out' the credit and financial markets.

BTW, in reading the article you posted, here is the bottom line:

""This teetering derivative market can't be bailed out. There simply isn't enough money. But our rulers think that the banks, insurance companies and stock brokerages heavily indebted and riddled with derivatives can be saved. As Ellen Brown pointed out last Thursday, save them and you stop the full exposure of the derivatives market. You avoid the risk of people finding out that their money and investments are being held by institutions willing to invest in financial products that are, at the least, highly speculative and, at the worst, pure vaporware."...

[burythehatchet]

28. Excellent. I'm going to eat a kiwi in your honor.

:)

[muriel_volestrangler]

34. Instinctively, I think a halving of all agreed interest rates would be more beneficial

A halving of existing debts to banks doesn't get rid of the money that was 'created' by the fractional reserve process. Those who borrowed will hang on to it, that's all. It's a transfer of the capital from the banks to their debtors.

While you may feel that is desirable, it's going to make it more likely that a bank cannot repay its depositors. You might get away with this at a time when the banks are rich (a sort of 'windfall tax' on banks), but to do it when it's clear they've screwed up their system seems very much the wrong thing to do.

Consider: Depositor A deposits $100 with bank B, and is told they'll get 5% interest per year. B lends $90 of it to C at 10% interest for 5 years (as their fractional reserve system allows), and hopes A doesn't want to withdraw the money. In the first year, C pays $9, B pays $5 to A, and keeps $4 as profit.

Now the 'halve the debt' law comes along. C will now only have to repay $45 after another 4 years. Over the whole 5 years, C will have paid $45 in interest (or would you halve that, too?), and so the bank will have exactly the $90 back - but, meanwhile, it had to pay $25 back to A as interest. Even if B gives up all the profit it thought it would make, it can no longer give A back all of the original $100 - it would have the $10 it put aside as a reserve, $45 repaid, and the $20 it thought it would make as profit over 5 years. Only $75 available to give back to A.

With banks already in trouble, a universal halving of the money owed to them, without an accompanying reduction in the money they have to pay back to depositors, will almost certainly bankrupt them - with or without a run on the banks, when depositors realise that, in the long run, some of their money will not be repayable.

It'd be better to nationalise banks, and sort out individual cases of what debts are repayable at what rate, and how much depositors can then be paid; or, if you insists on a 'one size fits all' solution, halve all interest rates - and that would have to include the interest paid to depositors. This effectively decreases how much we rate the usefulness of holding capital - we're admitting "the future isn't so bright that we can expect huge growth by anyone running businesses, so that they can pay back interest on the loans we make to them". Of course, some official interest rates have been coming down a lot, already - but the interest paid by borrowers from each bank hasn't come down as much, in many cases.

At least this way of benefiting the borrowers, at the expense of depositors and the banks, happens bit by bit (because it's the regular interest), rather than a shock to the system that would likely cause a complete crash. But I think nationalisation would be a far less drastic solution, and one that would allow for 'fairness'.

On edit: Unless, of course, you're going to allow the banks to print the money so that they can pay back their depositors. But then, do you say they're allowed to print $25 in my example - and hope that the $20 profit they made was all retrievable? Or accept that some of it was actually genuine business expenses, and allow them to print money to cover that too - $5, perhaps? In the end, you'd more or less have to say how much money is there in the bank overall, and use it to ensure depositors can be paid back, while giving the borrowers a fair deal, and the bank owners come last. Nationalisation, in other words.

[blindpig]

37. 'They', of course, would never stand for it.

Half their assets? No way in hell would the stand for that, it's a 'slippery slope', don't ya know.

Fuck it, confiscation with no compensation, they've had theirs, now we take ours. And keep it, cause it is ours.

[autorank]

39. Kick

:kick: for equity

[althecat]

47. ..

:kick:

[B o d i]

48. I'm not in debt, other than societal debt that's been taken on my behalf.

The median of what everyone else is getting on my own magnetic card would help me object a bit less.