Time for debt forgiveness?

[Zanza]

How do you think this "normal" government spending can be financed?

Sorry I thought by printing money you meant it was monetary not fiscal policy.

For countries with high household debt that's holding back the recovery this is a relatively cheap way to address the problem.

Maybe. But if the proposed solution is to print money, I would prefer that spelled out.

[Tamas]

They didn't "have" to bail out the creditors, they just chose to.

Fair point.  But that doesn't change the point that moral hazard flew out the window when we bailed out the bad creditors.

That is what apparent throughout the entire world economy, and I can spell the reason for it very easily:
state interventionalism

Two questions immediately spring to mind.  Why were there significantly fewer financial crises before deregulation in the 80s - during the Keynesian heyday of the short post-war?  Why is it that the interventionist, heavily statist countries of Northern Europe had a better recession and are having a better recovery than the swashbuckling free marketeers of the UK, the US and Ireland - just a few years ago all held up as admirable models for countries like Germany, the sick man of Europe?

Let's not call the US a swashbuckling free market, with their gian bailouts and QEs. Hell, haven't they been almost constantly bailing out smaller or bigger banks since like, the 60s or 70s?

Also, I am not sure how relevant is a period immediately following humanity's biggest cataclysm, but I don't really know that much about that era in the western world. But if throwing historical periods around, I could come back with two things: what would have happened to the keynesian model if there was no world war, and, more importantly, is it a coincidence, that the lower the weight of bearucracy (too lazy to check the spelling ), the better for development? The USA in the 19th century and early 20th century, or, as a global example, the greed-driven expansion of Europe, and the stagnation of the well-administrated Chinese Empire?

As for Northern Euros - they were I guess less stupid and careless, plus, let's not underestimate the economic dominance the EU and euro gave for Germany. Or strengthened their dominance. At any rate, you might say that the most significant de-regulation of the region (removal of borders, tariffs, limits on foreign investment), profited the model regulators in a lot of ways.

[Tamas]

How do you think this "normal" government spending can be financed?

Sorry I thought by printing money you meant it was monetary not fiscal policy.

For countries with high household debt that's holding back the recovery this is a relatively cheap way to address the problem.

Maybe. But if the proposed solution is to print money, I would prefer that spelled out.

You will never hear that spelled out. It sounds bad.

[Viking]

The Lannisters disapprove of this thread. This isn't fair to those of us who pay our debts. Moral Hazard and whatnot.

What is your view on Bankruptcy laws which also function to forgive the debtor?

Not all Bankrupcy Laws function to forgive the debtor, e.g. Norway. Which has the unfortunate consequence of either forcing the bankrupt to never again have property or to exist completely in the black economy. Basically if you owe the bank a billion dollars you get X thousand crowns per month to live on and the rest goes to the bank. This is a very very bad law imho though.

Bankrupcy laws are not about forgiving the debtor they are about the vampires divvying up the remaining blood in the corpse with Dracula (the government) getting his full share before the others have to divide the rest up.

The issue is really if you write down the debt of the bankrupt or not. What Sheilbh is suggesting is mandating a write down of debt before bankrupcy.

[Viking]

This isn't fair to those of us who pay our debts. Moral Hazard and whatnot.

If we'd not already had to bailout or nationalise the creditors I'd have a lot more sympathy with this argument.

But the IMF suggest that some problems of moral hazard can be avoided to some extent by steps like limiting to people with debt greater than 110% of household's assets, or in previous US programs to households already in default.  So those households were only going to leave the lender with a total loss and default while the bargain collapsed.  One option they suggest is having a general speedy process for cases in which a write down or default's inevitable and a more lengthy case-by-case system for more complex or dubious cases.

I think this is like the opposite of Obama's suggestion (cribbed from Romney's advisor) about helping households who are in negative equity but still paying the mortgage.

Nationalizing the Institutions /= Bailing out the creditors.

Thought your argument here is that the bottleneck in handling so many bankrupcies is a problem is a serious one.

[Martinus]

Not all Bankrupcy Laws function to forgive the debtor, e.g. Norway. Which has the unfortunate consequence of either forcing the bankrupt to never again have property or to exist completely in the black economy. Basically if you owe the bank a billion dollars you get X thousand crowns per month to live on and the rest goes to the bank. This is a very very bad law imho though.

Bankrupcy laws are not about forgiving the debtor they are about the vampires divvying up the remaining blood in the corpse with Dracula (the government) getting his full share before the others have to divide the rest up.

The issue is really if you write down the debt of the bankrupt or not. What Sheilbh is suggesting is mandating a write down of debt before bankrupcy.

Are you talking about corporate bankruptcy or personal bankruptcy? I would guess you are talking about the latter, whereas the real economic function of bankruptcy is in the corporate set up (and protection of shareholders). Personal bankruptcy is not such a widespread concept, and indeed it does not really allow for "debt forgiveness" in most cases.

[Sheilbh]

Let's not call the US a swashbuckling free market, with their gian bailouts and QEs. Hell, haven't they been almost constantly bailing out smaller or bigger banks since like, the 60s or 70s?

That's my point though.  The period of state intervention until the 70s was one of general stable growth.  There weren't any financial crises that I can think of since then we've deregulated and there have been financial crises and a couple of bailouts.  But it's not been that common, QE was unprecedented when it first happened and the scale of the crisis and the response to it was similarly unprecedented.  It was the biggest since the Great Depression.  That it's economic effects were controlled is, in large part, due to state intervention and that it's social effects were mitigated is due automatic stabilisers of the welfare state.

Which isn't to say deregulation was wrong in the 80s.

Also, I am not sure how relevant is a period immediately following humanity's biggest cataclysm, but I don't really know that much about that era in the western world. But if throwing historical periods around, I could come back with two things: what would have happened to the keynesian model if there was no world war, and, more importantly, is it a coincidence, that the lower the weight of bearucracy (too lazy to check the spelling ), the better for development? The USA in the 19th century and early 20th century, or, as a global example, the greed-driven expansion of Europe, and the stagnation of the well-administrated Chinese Empire?

I don't understand your second point of historical analogies mixed with moralism.

My understanding is that the second world war was needed to create Keynesian state - the world economy was shattered and there was a desire to create international controls through the Bretton Woods system and local controls to the economy so that the extremes of economic fluctuation in the 30s wouldn't happen again.  Those extremes were, after all, to some extent responsible for the war.  But this was the era when the US, Germany, France, Italy and, to an extent, Britain enjoyed economic golden ages of full unemployment, low inflation, stable growth.  My understanding, though, is that actually Keynes's inter-war analyses are really interesting and pretty accurate.

But obviously we can't go back to that and it's a bit like yearning for the guild system.  It was however a good period economically and not just because of rebuilding and there are lessons for us.  But I think your monocausal view that everything is due to the state is somewhat shaped by Eastern European experiences of government as a almost solely force for oppression in most of the last century and to the current seeming slide of Hungary into a sort-of Putinist autocracy.  I don't generally agree with Raz on this but I think your extreme cynicism about the government seems merited when you read about Fidesz, but maybe not other countries.  There are problems with the government and it should never be over mighty, but it's not an evil in itself - especially not as experienced in countries in different parts of the Western world with different political traditions.

As for Northern Euros - they were I guess less stupid and careless, plus, let's not underestimate the economic dominance the EU and euro gave for Germany. Or strengthened their dominance. At any rate, you might say that the most significant de-regulation of the region (removal of borders, tariffs, limits on foreign investment), profited the model regulators in a lot of ways.

Okay but another example would be Canada.  My understanding is that like the Swedes they had a financial crisis in the 90s.  After that they instituted stronger financial regulation and in 2008 their banks didn't collapse. 

Obviously there's other things going on but it does seem striking that the worst of this crisis seems to have hit countries with traditions of light touch regulation (UK, US, Ireland) or inefficient and often ignored over-regulation (Italy) more than countries with a relatively active economic role for the state (Germany, Scandis) or with a strong regulatory framework (Canada, NZ, Australia).  Again it's not the only issue but I think it's part of it and it does argue against state intervention being the root of all evil.

You will never hear that spelled out. It sounds bad.

I'll spell it out.  At the moment, during the hangover of this crisis, I wouldn't turn the printing press off.

[Viking]

Not all Bankrupcy Laws function to forgive the debtor, e.g. Norway. Which has the unfortunate consequence of either forcing the bankrupt to never again have property or to exist completely in the black economy. Basically if you owe the bank a billion dollars you get X thousand crowns per month to live on and the rest goes to the bank. This is a very very bad law imho though.

Bankrupcy laws are not about forgiving the debtor they are about the vampires divvying up the remaining blood in the corpse with Dracula (the government) getting his full share before the others have to divide the rest up.

The issue is really if you write down the debt of the bankrupt or not. What Sheilbh is suggesting is mandating a write down of debt before bankrupcy.

Are you talking about corporate bankruptcy or personal bankruptcy? I would guess you are talking about the latter, whereas the real economic function of bankruptcy is in the corporate set up (and protection of shareholders). Personal bankruptcy is not such a widespread concept, and indeed it does not really allow for "debt forgiveness" in most cases.

With corporate bankrupcy here in norway the law basically liquidates companies. There is no Chapter 11 style restructuring. In both cases a debtor can petition for bankrupcy but usually the creditor petitions the court to have the debtor declared bankrupt or delinquent, in either case the court basically liquidates all property. The Norwegian process starts where Chapter 11 is declared a failure.

Updating the law comes up routinely and routinely the norwegian people are usually very disapproving.

[Admiral Yi]

Let's not call the US a swashbuckling free market, with their gian bailouts and QEs. Hell, haven't they been almost constantly bailing out smaller or bigger banks since like, the 60s or 70s?

No.  Large numbers of Savings & Loans (credit unions) failed in 1989.  They were not bailed out.  They were shut down and sold off.  That's what you're supposed to do if you have a system of public deposit insurance.

[CountDeMoney]

I don't see why all debt can't be forgiven;  after all, it benefits the debtor, and it's not like the lenders--who aren't being paid at the moment anyway--aren't making payroll.

It's all make-believe money.

[Ideologue]

But if throwing historical periods around, I could come back with two things: what would have happened to the keynesian model if there was no world war, and, more importantly, is it a coincidence, that the lower the weight of bearucracy (too lazy to check the spelling ), the better for development? The USA in the 19th century and early 20th century, or, as a global example, the greed-driven expansion of Europe, and the stagnation of the well-administrated Chinese Empire?

Tam, I might have something more substantial in a minute, but are you out your mind?

The Qing Empire--and China generally throughout its history--has been one of the most, if not the most ineptly governed, major nations outside of the Islamic countries.

[Tamas]

I mostly referred to their state apparatus managing stunts like having the Emperor strangle their foreign trade expeditions and the like.



And Sheilbh, state is a necessary evil. How much of it is necessary is open to debate of course, but ideally, when facing a problem, the main question for society should be: how can we resolve this without throwing taxpayer money at it (in the form of grants, additional red tape or whatever). Yes, I would frown less on the state if I was living under the reign of one which actually works, and it's not like a "minarchism or death!" issue of mine - I have no illusion about the aristocracy relinquishing power to the middle class on their own accord, that never happened.

BUT, one of the thing which also stems from my Hungarian POV, is that I have seen what reliance on the state eventually turns a nation into. And however well a strong state works in a given country, the danger of screwing it all up always lurks there, for the simple reason of entrusting a few people with huge power.

[Sheilbh]

But I don't think the size or ability of the state matters so much as its nature.  The state in my view is broadly neutral.  Its qualities are determined by the institutions, the respect and the policies.  With the right institutions, political culture and all the rest a healthy democracy can sustain a very strong state or not.

Also 'the state' is a terribly abstract phrase but I mean everything from the Parish Council up. 

I have no illusion about the aristocracy relinquishing power to the middle class on their own accord, that never happened.

It did in some places.  Generally though it does come with guillotines in central squares.

And however well a strong state works in a given country, the danger of screwing it all up always lurks there, for the simple reason of entrusting a few people with huge power.

Oh absolutely.  But that's why you need independent institutions that carry respect enough to counter-weight a few dangerous people.  If there's no respect for the institutions that make up the state then it's only a matter of time before someone abuses them and no-one really cares.

[Tamas]

If there's no respect for the institutions that make up the state then it's only a matter of time before someone abuses them and no-one really cares.

Good point. Altough, the more practical influence the state/government has on people's life (and you can either have that via brute force or tax and economic policies), the easier it is to abuse the power, and, often, the harder to notice that from the populace.

Also, regarding the economy, I think that the middle class was the driving force behind all democratization processes, as well as economic developments. And redistribution hurts the middle class. It benefits the rch and the poor, while locking them both in their strata, at the expense of the middle, and due to the historical importance of the middle class, this hinders progress.

[Sheilbh]

Also, regarding the economy, I think that the middle class was the driving force behind all democratization processes, as well as economic developments. And redistribution hurts the middle class. It benefits the rch and the poor, while locking them both in their strata, at the expense of the middle, and due to the historical importance of the middle class, this hinders progress.

I don't quite lionise the middle class so much.  But I also disagree.  I frankly find this idea just weird.  The creation of the mass middle class is an achievement, certainly in Britain, of the post-war era.  It happened in part because of redistribution.

I think the experience is similar in Europe and the US that the emergence of the mass middle class is something that's really happened over the last 60 years or so.