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Like Mish, I’m also puzzled by Keen’s debt jubilee idea.
Keen’s basic argument is that debt deleveraging is deflationary, therefor we have to have some sort of taxpayer funded quick reduction in debt levels to regain full employment. I’m baffled: why can’t some good old fashioned straightforward stimulus make up for the deflation stemming from elevated levels of debt?
Plus there are plenty of wealthy debtors, e.g. people living in McMansion houses, and plenty of low income people not in debt. Why do those living within their means have to subsidise the greedy?
I believe Keen proposes a 'repayment-coupon' to all people. Those with outstanding debt are obliged to use the 'repayment-coupon' to pay-down debt. Any remaining amount after all debts have been payed-down can be used for personal consumption. I'm not sure if Keen proposes a fixed amount for each person or an amount proportional to personal income.
Either way, this is a form of 'stimulus' which is targeted at the source of the problem. Such a policy would reward those who have little or no debt.
As to debtors who are happy with their level of indebtedness, they’ll use the coupon to repay their debts, and then re-incur debt and spend the proceeds as quickly as possible. We’d need ten thousand bureaucrats to stop that dodge, and I don’t think they’d succeed.
Moreover, this lot are not the source of the problem, i.e. they aren’t currently deleveraging.
Second, there are those who think they have too much debt, they’ll use the coupon to pay down their debts. But given stimulus WITHOUT Keen’s scheme, this lot will use stimulus money to pay off their debts ANYWAY.
Third, there are those with no debts, they’ll just spend and/or save the coupon money. But they’d do the same with stimulus money without Keen’s scheme.
RML "they’ll use the coupon to repay their debts, and then re-incur debt and spend the proceeds as quickly as possible."
Well, they can only do this if creditors extend credit to them, which was the problem in the first place. We need to reduce the private debt level, but we don't need a debt jubilee to do it. What is needed is prosecuting the law against fraud and predatory lending, and cram downs of credit imprudently extended that cannot be paid.
Creditors have already been granted extraordinary privilege and forbearance due to their financial and therefore economic importance, in spite of their bad behavior. That behavior needs to be addressed and part of that needs to be writing down debts that involved imprudence on the part of professionals with fiduciary responsibilities. A debt jubilee such as proposed by Keen would reward their bad behavior by giving people the funds to pay them off. This would increase already astronomical moral hazard on the side of both creditors and borrowers, but most on the side of creditors. This would just reprime the cycle and more the same would ensue.
I mis-used the word 'source'. As Tom highlights the bad behavior of Creditors is also an important problem, which I would rank as equal to the financial distress of people.
@Ralph
If people so choose to re-incur debt, then IMO this is not a 'bad thing' as it adds to demand. Either way incomes of people must be increased, now they either have the choice of paying down debt or increasing consumption. With the debt-jubilee people must make an additional choice in-order to re-incur debt. Presumably, the debt-jubilee would be accompanied with an improvement in lending laws, which would prevent people from re-incurring debt. Debt-jubilee is better than simple fiscal expansion at encouraging people to deleverage.
If the Debt-jubilee wasn't accompanied with an improvement in lending laws, and assuming that everyone hasn't learnt from the financial crisis and chooses to re-incur debt with their jubilee-coupon, then this would be functionally equivalent to Mosler's income-tax holiday( assuming the jubilee-coupon is proportional to incomes). So at the minimum the debt-jubilee is as 'bad' as Mosler's income-tax holiday. So any criticisms of the debt-jubilee are also applicable to Mosler's income-tax holiday.
And to emphasize this only addresses one part of the problem, and as Tom highlights dealing with the financial criminals is equally important.
Without addressing the fundamental flaws of capitalism, which basically feudalism morphing into industrial capitalism and now into financial capitalism, ameliorating is simply postponement, a time way to rest and rese in the game, then the game goes on under the the same rules. No different result can be expected in the future.
6 comments:
Like Mish, I’m also puzzled by Keen’s debt jubilee idea.
Keen’s basic argument is that debt deleveraging is deflationary, therefor we have to have some sort of taxpayer funded quick reduction in debt levels to regain full employment. I’m baffled: why can’t some good old fashioned straightforward stimulus make up for the deflation stemming from elevated levels of debt?
Plus there are plenty of wealthy debtors, e.g. people living in McMansion houses, and plenty of low income people not in debt. Why do those living within their means have to subsidise the greedy?
I believe Keen proposes a 'repayment-coupon' to all people. Those with outstanding debt are obliged to use the 'repayment-coupon' to pay-down debt. Any remaining amount after all debts have been payed-down can be used for personal consumption. I'm not sure if Keen proposes a fixed amount for each person or an amount proportional to personal income.
Either way, this is a form of 'stimulus' which is targeted at the source of the problem. Such a policy would reward those who have little or no debt.
Shaun Hingston
Lowerleftlimit: I’m still sceptical.
As to debtors who are happy with their level of indebtedness, they’ll use the coupon to repay their debts, and then re-incur debt and spend the proceeds as quickly as possible. We’d need ten thousand bureaucrats to stop that dodge, and I don’t think they’d succeed.
Moreover, this lot are not the source of the problem, i.e. they aren’t currently deleveraging.
Second, there are those who think they have too much debt, they’ll use the coupon to pay down their debts. But given stimulus WITHOUT Keen’s scheme, this lot will use stimulus money to pay off their debts ANYWAY.
Third, there are those with no debts, they’ll just spend and/or save the coupon money. But they’d do the same with stimulus money without Keen’s scheme.
Keen’s scheme would have zero effect.
RML "they’ll use the coupon to repay their debts, and then re-incur debt and spend the proceeds as quickly as possible."
Well, they can only do this if creditors extend credit to them, which was the problem in the first place. We need to reduce the private debt level, but we don't need a debt jubilee to do it. What is needed is prosecuting the law against fraud and predatory lending, and cram downs of credit imprudently extended that cannot be paid.
Creditors have already been granted extraordinary privilege and forbearance due to their financial and therefore economic importance, in spite of their bad behavior. That behavior needs to be addressed and part of that needs to be writing down debts that involved imprudence on the part of professionals with fiduciary responsibilities. A debt jubilee such as proposed by Keen would reward their bad behavior by giving people the funds to pay them off. This would increase already astronomical moral hazard on the side of both creditors and borrowers, but most on the side of creditors. This would just reprime the cycle and more the same would ensue.
I mis-used the word 'source'. As Tom highlights the bad behavior of Creditors is also an important problem, which I would rank as equal to the financial distress of people.
@Ralph
If people so choose to re-incur debt, then IMO this is not a 'bad thing' as it adds to demand. Either way incomes of people must be increased, now they either have the choice of paying down debt or increasing consumption. With the debt-jubilee people must make an additional choice in-order to re-incur debt. Presumably, the debt-jubilee would be accompanied with an improvement in lending laws, which would prevent people from re-incurring debt. Debt-jubilee is better than simple fiscal expansion at encouraging people to deleverage.
If the Debt-jubilee wasn't accompanied with an improvement in lending laws, and assuming that everyone hasn't learnt from the financial crisis and chooses to re-incur debt with their jubilee-coupon, then this would be functionally equivalent to Mosler's income-tax holiday( assuming the jubilee-coupon is proportional to incomes). So at the minimum the debt-jubilee is as 'bad' as Mosler's income-tax holiday. So any criticisms of the debt-jubilee are also applicable to Mosler's income-tax holiday.
And to emphasize this only addresses one part of the problem, and as Tom highlights dealing with the financial criminals is equally important.
Shaun H.
Without addressing the fundamental flaws of capitalism, which basically feudalism morphing into industrial capitalism and now into financial capitalism, ameliorating is simply postponement, a time way to rest and rese in the game, then the game goes on under the the same rules. No different result can be expected in the future.
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