“And forgive us our debts, as we forgive our debtors.”(Matthew 6:12 – King James Version of 1611)
Debt forgiveness is in the news and beginning to circulate as an idea which might be a solution to the financial crisis. In the UK, premier David Cameron got in a mess when headlines claimed that he intended to say that people should pay down their debts. Of course, most would love to do so, but can’t as they don’t have the money to pay them back. It prompted remarks in newspaper articles like this one in the London Observer, by William Keegan:
“The nation’s credit card debt is £67bn. So why does the government not copy Solon the legislator (circa 638BC-558BC), who cancelled all debts, and wipe out that credit card debt? Cheaper than quantitative easing…”
The next day, Keegan was followed by George Monbiot writing in the Guardian about the threat of a depression. He took up the ideas of critical economist, Steve Keen, and called for a Jubilee – which means a unilateral write-off of debts.
Jubilees occurred in some parts of the Ancient World every 50 Years – e.g. in Mesopotamia c 2000BC. For those who have a copy of the Old Testament they can find a description of a Jubilee in Leviticus 25.
Similar ideas calling for a Jubilee have begun to appear in the USA too with the suggestion that it could help kick start the American economy:
This is important because the “Occupy” movement is growing fast and is looking for simple ideas that people could get behind to resolve the debt crisis. It seems inevitable that the idea of a debt write-off will grow and in this article I suggest a way in which a Jubilee could be administered effectively and fairly. For let us be under no illusion: merely writing off debts leaves a few problems and isn’t even that fair. As a simple solution on its own it would it leave the banking system broke and thus no payments coming out of the cash machines. And people like me, who have never been in debt in our lives, would wonder why people who had been reckless and imprudent with their money were being rewarded and not those who had been more cautious.
Despite the reservations and problems there is a way that it can be done fairly. There is an approach that would leave the banking system to some degree intact and I want to describe it here. I will then go on to suggest that after the banking system is cut down to size through a jubilee it should have its wings permanently clipped so that it cannot get us into the same mess again. However, before describing this solution, let us get a proper understanding of what the problem is. Why is it not possible just to unilaterally cancel all debts?
Getting out of the Banking Catch 22
Key among these problems is that a large part of the bank sector would go bust. There seems to be a Catch 22 here which has politicians and officials going round and round in circles. This problem is that if the banks collapse there will be no money there when ordinary people put their cards in the cash machines or try to pay with these cards at supermarket check outs. Since almost all of the money in circulation is created by banks when they lend it follows that almost all the money is backed by debt. If you cancel the debt this bank money is backed by nothing. The banks would go bust and would not be able to pay out when you put your card in the machine in the wall.
So, if we want to have a functioning finance system, then at the present time we must keep the banks healthy. That’s a nice situation for them to be in and they are using ths dilemma at our expense. They can gamble on developments in international finance markets and if they win they keep the profit. If they lose then we pay – because they have to be bailed out by taxpayers. But this clearly cannot go on because now the taxpayers in some countries are on the hook for so much that states are going bust too – and, guess what, banks are gambling against those states going bust…..
To let this continue to happen is crazy. As Steven Keen argues in the second edition of his book Debunking Economics
“When borrowing is undertaken to speculate on asset prices debt tends to grow more rapidly than income. This growth causes a false boom while it is happening, but results in a collapse once debt growth terminates – as it has done now.
“Though borrowers can be blamed for having euphoric expectation of sustainable capital gains, in reality the real blame for Ponzi schemes lies with their financiers – the banks and the finance sector in general – rather than the borrowers. That is blindingly obvious during the Sub-Prime Bubble in the USA, where many firms wilfully wrote loans when they knew – or should have known – that borrowers could not repay them.
“These loans should not be honoured. But that is what we are doing now, by maintaining the debt and expecting that debtors should repay debts that should never have been issued in the first place. ” (Steve Keen, Debunking Economics, Zed Books, 2011, p354)
But Keen then recognises that this would not be easy to implement as it would bankrupt much of the finance sector. So do we come around full circle? Is there a way out?
The answer is ‘yes’. As I have just explained – the current dilemma is that if you cancel debts then the bank deposit money created by lending is no longer backed by anything and the banks goes bust. However, this is solvable if the central bank creates an equal amount of non debt money to replace the deposits that are no longer backed by anything.
Deficit Easing and Debt Cancellation
A few months ago on the Feasta website Richard Douthwaite wrote about an idea call “deficit easing” which is an alternative to “quantitative easing”. Put simply he proposed that the European Central Bank (or any other central bank) create non-debt money and give it to governments to spend. http://www.feasta.org/wp-content/uploads/2011/07/Deficit_easing_RD.pdf
As part of this idea he suggested that some of the money might be given straight to individuals so that they could either pay down their debts or use it to invest in green projects. This is the core proposal which I think should be suggested to the Occupy Movement.
Note here the additional idea that some of the money created could be used by households to invest in green projects. This is an important part of the scheme for reasons of social justice and ecological efficiency. It is not only the banks who would not be too happy if ALL debts were simply cancelled. The fact is that some people are very much in debt, some people are only a small amount in debt and some are not in debt at all – like me for example. There are many reasons for this disparity and I dare say that in my case it was partly good fortune – for example I did my higher education at a time when there were student grants and not loans. However, I am not in debt because I do not own a house, I do not own a car and in fact I own very little. I do not have a consumerist lifestyle. I don’t mean to be ‘holier than thou’ but, at least in part, the reason some other people are deeply in debt is surely because they took on the consumerist values which are so damaging to the ecology of the planet and also because some of them burned their fingers speculating. To use the more moralising terminology of Adam Smith, some of the debt is by “Prodigals and Projectors” and their use of finance has not been good for the economy or the environment. Bailing each individual out for up to the full amount of their very different levels of debt does not seem to me very fair either – and might even be seen to reward prodigality and recklessness.
Instead we need a scheme with a pattern of rewards and incentives that is more appropriate to the times that we live in. This could be achieved by giving people the wherewithall to reduce their debts if they have debts, but also giving the same amount to people who have no debts, or have low debts, which they could use too – not on a consumption binge, but on green investment to bring down our ecological debts (the carbon intensity of our lifestyles).
So how would this be organised?
Here’s how it might work (in the UK – you could adapt it to your country if you don’t live in the UK).
Every adult individual gets a voucher for, say, £25,000 (in the UK) – or some other sum……
On the voucher it explains that the voucher can be used by the person to whom it is addressed in one, or both, of two ways:
to repay debts or money owed to any lender organisation or company in the UK registered with the Financial Services Authority – all such lenders will be obliged to take early re-payment on receipt of a voucher up to the whole value of the voucher, or whatever percentage of it that the voucher holder wishes to use for debt repayment purposes. FSA registered lenders receiving re-payments with the vouchers can then claim cash from the central bank which will be paid into accounts set up for them at the Bank of England.
the vouchers could be used to make payments for invoiced services or products for energy efficiency or renewable energy work from companies or organisations already existing as at October 2011 which are also part of recognised industry trade associations like the Energy Systems Trade Association, the Federation of Environmental Trade Associations, the Energy Institute, the Renewable Energy Association etc. Some people do not own their homes so alternatives would be needed too – for example allowing people to invest in bonds that support renewable energy development. The green economy sector could be invited to submit proposals for what would qualify.
The requirement for these to be pre-existing organisations registered with trade associations is to prevent cowboys getting in on a bonanza. Over time proposals might be worked out for accreditation to allow new firms to set up with suitable skills. Companies wishing to apply for this work, or source of capital, will be obliged to register their interest with their trade association and will submit proof of payment of a voucher or part of a voucher to their trade association which will maintain an account with the Bank of England.
Vouchers must be presented for repayment of debts within so many months of receipt of the voucher.
Vouchers (or parts of vouchers) used for energy efficiency, renewable energy work or investment in clean energy can be redeemed over a longer time period – as it would take time for suppliers to gear up and increase their capacity to deliver.
In his article Richard Douthwaite suggests that if governments are timid lest this kind of money creation and money use sparks inflation, there is the option of doing it in incremental stages. So, in my example, this might mean something like £10,000 per individual now , £10,000 next year, and £5,000 the year after, with the state and monetary authorities feeling their way. If a recession or a depression is starting the creation of new money would be no bad thing to help to prevent the downward slide. When banks do not lend and people and companies are paying back their loans they do so by using their deposits to pay back to the bank so the money in circulation actually falls and deflation sets in. The process described would work against this.
When the central bank redeemed the vouchers they would do so by paying non-debt money into accounts of Financial Services Authority registered lenders at the central bank. So bank assets in the form of loans would fall but bank assets in the form of money reserves at the central bank would rise by equal amounts. There would now be £25,000 more than previously in each individual’s account, equal to the non-debt money created by the central bank.
The bank reserves of newly created central bank money would be inactive and not in circulation unless and until the banks lend it out again. On the other hand households whose debts were reduced would now be paying much less in debt service charges and be more inclined to spend a higher proportion of their income.
So the banks will find themselves with lots of cash but far fewer remaining loans outstanding from households. Because the banks make their money through loans the profitability of banks would fall – but they will still be solvent as they will be sitting on lots of cash. Unlike a straight bank loan write-down this will mean that most banks would probably survive. However, they would shrink in size and importance as their importance is based on the debt they own. If debt is being paid off their power would shrivel. Conversely the burden on households would be reduced – although those imprudent enough to borrow very large amounts would still be on the hook for some of their earlier borrowing.
At the moment quantitative easing is not leading to increased lending to the real economy by the banks because economic activity and confidence is collapsing. The banks fear to lend and businesses fear to borrow. So the part of aggregate macro economic demand which was based on debt creation is no longer there. However, with this scheme aggregate demand would be be lifted because people would be relieved of their debt servicing costs and because of their spending of some of the vouchers to transform the energy sector.
This scheme could also be combined with policies like Cap and Share which would give an even more powerful direction to the post-Jubilee economic transformation. With Cap and Share carbon is driven out of the economy by demanding that fossil fuel sellers have permits for all the oil, gas and coal that they sell. There is a ceiling set on the number of permits and it is brought down over time so the amount of carbon allowed to enter the economy when fossil fuels are sold is forced down. This is made palatable for the public because when the limited number of permits are sold to the energy suppliers most of the money from the sale of the permits goes to them, the public, on a per capita basis.
This would give the banks a clear direction for their new lending when they restart after the Jubilee – but not operating in the way that they did before. This must not be allowed to happen.
Having brought the banks down to earth they must permanently have their wings clipped so that we do not have this situation arising again. There is a famous quote that we should take to heart. It is from a 1927 lecture by Sir Josiah Stamp who became Director of the Bank of England in 1928, though the veracity of the quote has been challenged:
“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . . Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.”
Whether Sir Josiah Stamp really did say this, or not, it nevertheless contains an important truth. If people repay their debts to the bankers but the banking system remains in its current form, within a few years we would probably be back in the same situation again. A permanent solution is needed and that permanent solution is provided by applying and adapting ideas currently being put forward by the Positive Money campaign in the UK. ( http://www.positivemoney.org.uk/ )
The Positive Money Campaign makes a number of proposals but the one which concerns me here is the one that takes away from bankers the right to create money when they lend. What this would mean, if implemented at this time, is that the cash that the bankers now have from repaid debts could be used by them to make loans – but it would not be allowed for them to “leverage” it. It could not be used in a fractional system to create ten or twenty times the level of credit and new money that they were left with after the Jubilee.
No doubt that banks will scream and shout and protest at ideas like this. But they should be grateful that they would be allowed to receive a pay-back payment for cancelled debt at all. In the new arrangements they would have to risk their money if they then lend it out again. If they wanted to lend the “pay-back money” out again the accounting procedures would be different. When they lent it that money would leave their accounts and enter the accounts of the borrower. They would get it back when the borrower repaid. It would not be possible to lend a multiple of it as is the case at the moment. (Footnote 1)
The main problem at the moment is the very high level of debt plus the deep uncertainty and the lack of a common direction and orientation for economic activity. An ecological jubilee and cap and share would solve that.
This is explained here in a rather long winded fashion for the technically minded but it can be summed up much more punchily. If one is trying to get ideas into a mass movement then one needs to have slogans or phrases for short leaflets not essays. The slogans to match what I have said would be:
Create non debt based money – and use it to help the 99% pay down their financial debts and/or to reduce their energy costs
Create Non debt based money – and use it to help the 99% pay down their financial and/or their ecological debts
Bail out people not banks. Create money to pay down the people’s debts and to spend on energy transformation.
After writing this article Andy Ross pointed out to me a Financial Times article by its chief economics commentator, Martin Wolf. There is a certain similarity in ideas because MW proposes “credit easing” through money creation to give each person in the UK £1,250 – however there is clearly a crucial difference in magnitude.
If one imagines someone with £25,000 debts, paying 5% rate of interest then Martin Wolf’s £1,250 would pay their debt interest costs for a year. The proposal here is to make a substantial difference to write down their debts – not to leave them unchanged and pay off service costs for one year. For the record the average debt owed by the individual in the UK, including mortgages, is circa £30,306.
Note: Those who might want to use or adapt a more agitational leaflet on the same theme can download it from here: https://docs.google.com/document/d/1C9LkTf4h-Wqzw_ITod2qpX-Mhp8qkDFSSDZ8mf5M6no/edit?hl=en_US
Footnote 1: I am aware of an issue raised by critical economists like Keen, which criticises common misperceptions about how credit and money is created by the banks. This misperception is called the money multiplier and describes a process as if banks only extend credit, creating deposits, after the central bank has created new reserve money – whereas the truth is that the central bank creates new money as reserves to accomodate their private banks credit creation. However, this would be a unique event and situation. What is being said here is that, in these unique conditions after a Jubilee of the type described, and without further reform, banks would be re-starting with high levels of reserves and very few loans and would then likely expand following a money multiplier process if business conditions generated by the energy transformation allowed them to.
Featured image: Occupy Wall street spreads to Portland. Author: S51438. Source: http://en.wikipedia.org/wiki/File:Occupy_Wall_Street_spreads_to_Portland.jpg