A Modern Jubilee

Michael Hudson’s simple phrase “Debts that can’t be repaid, won’t be repaid” sums up the economic dilemma of our times. This does not involve sanctioning “moral hazard”, since the real moral hazard was in the behavior of the finance sector in creating this debt in the first place. Most of this debt should never have been created. All it did was fund disguised Ponzi schemes that inflated asset values without adding to society’s productivity. The irresponsibility—and Moral Hazard—clearly lay with the lenders rather than the borrowers.

The question we face is not whether to repay this debt, but how to go about not repaying it?
The standard means of reducing debt—personal and corporate bankruptcies for some, slow repayment of debt in depressed economic conditions for others—could have us mired in deleveraging for one and a half decades, given its current rate. That would be one and a half decades where the boost to demand that rising debt should provide—as it finances investment rather than speculation—is absent. Growth is too slow to absorb new entrants into the workforce, innovation is muted, and political unrest rises–with all the social consequences. Just as it did in the Great Depression.

So it is incumbent for society to reduce the debt burden sooner rather than later, so as to reduce the period spent in the damaging process of deleveraging. Pre-Capitalist societies instituted the practice of the Jubilee to escape from similar traps, and debt defaults have been a common experience in the history of Capitalism too. So a prima facie alternative to 15 years of delever­ag­ing is an old-fashioned debt Jubilee.

But a Jubilee in modern Capitalism faces two dilem­mas. Firstly, a debt Jubilee would paral­yse the finan­cial sec­tor by destroy­ing bank assets. Sec­ondly, in our era of secu­ri­tized finance, the own­er­ship of debt per­me­ates soci­ety in the form of asset based secu­ri­ties (ABS) that gen­er­ate income streams on which a mul­ti­tude of non-bank recip­i­ents depend. Debt abo­li­tion would inevitably destroy both the assets and the income streams of own­ers of ABSs, most of whom are inno­cent bystanders to the delu­sion and fraud that gave us the sub­prime xri­sis, and the myr­iad fias­cos that Wall Street has per­pe­trated in the 25 years since the 1987 stock mar­ket Crash.

We there­fore need a way to short-circuit the process of debt-deleveraging, while not destroy­ing the assets of both the bank­ing sec­tor and the mem­bers of the non-banking pub­lic who pur­chased ABSs. One fea­si­ble means to do this is a “Mod­ern Jubilee”, which could also be described as “Quan­ti­ta­tive Eas­ing for the public”.

Quan­ti­ta­tive Eas­ing was under­taken in the false belief that this would “kick start” the econ­omy by spurring bank lending. Barack Obama put it:

And although there are a lot of Amer­i­cans who under­stand­ably think that gov­ern­ment money would be bet­ter spent going directly to fam­i­lies and busi­nesses instead of banks – “Where is our bailout?,” they ask – the truth is that a dol­lar of cap­i­tal in a bank can actu­ally result in eight or ten dol­lars of loans to fam­i­lies and busi­nesses, a mul­ti­plier effect that can ulti­mately lead to a faster pace of eco­nomic growth. (Obama 2009)

Instead, QE’s main effect was to dra­mat­i­cally increase the idle reserves of the bank­ing sec­tor while the broad money sup­ply stag­nated or fell (see figure). There is already too much pri­vate sec­tor debt, and nei­ther lenders nor the pub­lic want to take on more debt.

Injections of money into banks had no effect on the money supply. Banks simply held the debt.
Injections of money into banks had no effect on the money supply. Banks simply held the debt.

A Modern Jubilee would cre­ate fiat money in the same way as QE, but would direct that money to the bank accounts of the pub­lic with the require­ment that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injec­tion would have their debt reduced but not elim­i­nated, while at the other extreme, recip­i­ents with no debt would receive a cash injec­tion into their deposit accounts.
The broad effects of a Mod­ern Jubilee would be:
Debtors would have their debt level reduced;
Non-debtors would receive a cash injection;
The value of bank assets would remain con­stant, but the dis­tri­b­u­tion would alter with debt-instruments declin­ing in value and cash assets rising;
Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;
The income flows to asset-backed secu­ri­ties would fall, since a sub­stan­tial pro­por­tion of the debt back­ing such secu­ri­ties would be paid off; and
Mem­bers of the pub­lic (both indi­vid­u­als and cor­po­ra­tions) who owned asset-backed-securities would have increased cash hold­ings out of which they could spend in lieu of the income stream from ABS’s on which they were pre­vi­ously dependent.
Clearly there are numer­ous and com­plex issues to be con­sid­ered in such a policy:

The scale of money cre­ation needed to have a sig­nif­i­cant pos­i­tive impact (with­out exces­sive neg­a­tive effects. [There will obvi­ously be such effects, but their impor­tance should be judged against the alter­na­tive of continued delever­ag­ing.]
The mechan­ics of the money cre­ation process itself (which could repli­cate those of Quan­ti­ta­tive Eas­ing, but may also require changes to regulation prohibitiing Reserve Banks from buy­ing gov­ern­ment bonds directly from the Trea­sury).
The basis on which the funds would be dis­trib­uted to the pub­lic;
Man­ag­ing bank liq­uid­ity prob­lems (since though banks would not be made insol­vent by such a pol­icy, they would suf­fer sig­nif­i­cant drops in their income streams);
Ensur­ing that the pro­gram did not sim­ply start another asset bubble.