Creditors argue, for instance, that if you forgive debts for a class of debtors – say, student loans – that there will be some “free riders.” Students freed from debt will benefit, while students who were able to carry and pay off their debts had to “meet their obligations.” It is further argued that if student debts are forgiven (or “junk mortgage” loans written down to fair real estate valuations), people will expect to have bad loans written off. This is called a “moral hazard,” as if debt writedowns are a hazard to the economy, and hence, immoral.
This is a typical example of Orwellian doublespeak engineered by public relations factotums for bondholders and banks. The real hazard to every economy is the tendency for debts to grow beyond the ability of debtors to pay. If large numbers of students remain liable to pay student loans without having obtained well enough jobs to pay, this will prevent them from being able to qualify for mortgage to buy a home and start a family. Many students today are obliged to keep living with their parents, and are unable to marry. The result is deepening economic austerity as a result of the debt overhead.
Meanwhile, defaults on student loans to for-profit colleges are projected as rising toward 40%. Is it worth it to say that to prevent giving these impecunious students a “free lunch,” it is worth keeping a large swath of the population poor and unmarried?....
The basic moral financial principal should be that creditors should bear the hazard for making bad loans that the debtor couldn’t pay — like the IMF loans to Argentina and Greece. The moral hazard is their putting creditor demands over the economy’s survival.
Michael Hudson — On Finance, Real Estate And The Powers Of Neoliberalism
Mutual Aid vs Moral HazardMichael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and Guest Professor at Peking University
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Michael Hudson: “Creditors argue, for instance, that if you forgive debts for a class of debtors – say, student loans – that there will be some ‘free riders’.”
The ultimate free riders are creditors, since these parasites charge compound interest on loan money they create out of thin air.
Michael Hudson: “Students freed from debt will benefit, while students who were able to carry and pay off their debts had to ‘meet their obligations’.”
This is a standard argument by creditors. “If you cut us off from the host, you will insult everyone that we parasites already sucked dry.”
Michael Hudson: "It is further argued that if student debts are forgiven (or “junk mortgage” loans written down to fair real estate valuations), people will expect to have bad loans written off. This is called a “moral hazard,” as if debt write downs are a hazard to the economy, and hence, immoral.
What’s immoral, and a hazard to the economy, is debt bondage, and creditor supremacy.
Michael Hudson: “There has been an explosion of discussion about whether to cancel student debts.”
Cancellation would destroy the world (even though college was free until the mid-1960s).
Michael Hudson: “The Bronze Age and early Western civilization were shaped so differently from what we think of as logical and normal, that one almost has to rewire one’s brain to see how differently the archaic view of economic survival and enterprise was.”
When you are raised from birth with 100% lies, the simplest of truths seem “very complex” to you. For this reason, some readers find Michael Hudson’s books to be “difficult and complex.”
Michael Hudson: “Credit economies existed long before money and coinage.”
That is, systems of money (i.e. debts and credits) existed long before coins and bills. Contrary to Adam Smith, no society has ever been based wholly on barter. Some Native American tribes (e.g. he Kwakiutl) had “gift based” economy in which they exchanged goods, but again, this was a system of debts and credits, not barter. Most of the earliest forms of writing (e.g. Sumero-Akkadian cuneiform) were mainly records of debts and credits.
Continued below
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Michael Hudson: “When debts were cancelled in Babylonia and other Bronze Age Near Eastern realms, it would have been against their way of thinking to complain that some debtors were benefiting from being freed from debts that other people had paid. Annulling such debts benefited the population at large.”
True, but in those days, populations were much smaller. Today’s peasants are rankled by the thought that someone they never knew (and never will know) gets a break, even though it benefits all of society. This is how the peasants keep themselves enslaved and impoverished. Creditor-parasites play solvent individuals against debtors.
Michael Hudson: “The moral opprobrium was felt toward creditors. They were blamed for impoverishing society at large by their selfishness. The Greeks called his hubris, money-love and wealth addiction.”
The Athenian politician and general Themistocles was a populist, having the support of lower-class Athenians, and generally being at odds with the Athenian nobility. During the first Persian invasion of Greece, Themistocles defeated the Persians at the Battle of Marathon. Later he helped Athens defeat Persia at the Battle of Salamis. After that, Themistocles became so rich, so arrogant, and so oppressive that Athenians exiled him for life. Pericles took over and raised Athens to greatness, but then Pericles destroyed Athens forever by needlessly declaring war on Sparta.
Michael Hudson: “Ceding financial control should be viewed as a form of warfare, which countries have a legal right to resist as ‘odious debt’ under moral international law.”
The USA, being pro-creditor, and pro-debt, would consider this to be blasphemy. Yet when the USA took possession of Cuba in 1898, Spain requested the US to pay back the debt owed to it by Cuba. The US refused and declared the debt to be odious -- that is, taken out by a despotic regime in order to finance policies at odds with the people’s interest. After that, the USA proceeded to impose odious debt on much of the world.
Michael Hudson: “The basic moral financial principal should be that creditors should bear the hazard for making bad loans that the debtor couldn’t pay — like the IMF loans to Argentina and Greece.”
Especially since the IMF creates loan money out of thin air.
Moral hazard is a ridiculous charge given that government privileges for private debt/credit creation DRIVE THE POPULATION INTO DEBT, .i.e. buying a house or an education WITHOUT borrowing from the usury cartel is nigh impossible for almost everyone now.
ReplyDeleteWhat is so hard to understand that banks should be 100% private with 100% voluntary depositors? And that if they aren't that "moral hazard" is a non sequitur morally speaking?
Besides which, Steve Keen's "A Modern Jubilee" would distribute new fiat equally to all citizens, debtors and non-debtors alike, eliminating even that feeble argument against justice.
ReplyDeleteKonrad says “the IMF creates loan money out of thin air.” That’s news to me. I realize that both central and commercial banks create money, but the IMF only has such money as IMF members give it, far as I know.
ReplyDeleteHudson’s conclusion doesn’t amount to much: that’s his claim that “The basic moral financial principal should be that creditors should bear the hazard for making bad loans that the debtor couldn’t pay.” My answer to that is that creditors normally do pay a price for silly loans under normal bankruptcy law, though debtors have to prove they’ve made significant efforts to repay the loan and/or would have to endure unacceptable hardship if forced to repay. Thus the $64k question, which Hudson doesn’t solve, is this: exactly how much hardship should be imposed on debtors?
Andrew, Steve Keen’s original debt jubilee idea which as you rightly say would consist of handing out astronomic amounts of freshly created money to both debtors and creditors was bonkers. It would be wildly inflationary, as I pointed out shortly after he first proposed it. He has since gone very quiet on the idea.
But I agree, as I’ve said before, that letting private banks print money results in more debt. The Nobel laureate economist Maurice Allais described that money creation activity of private banks as “counterfeiting”, and quite right. See the opening sentences here:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=160532
“Hudson’s conclusion doesn’t amount to much.” ~ Musgrave
ReplyDeleteRight. Hudson merely stands centuries of economic error on its head, and discusses trivial things like how debt destroys societies. Nothing to see here, folks.
“Hudson claims that, ‘The basic moral financial principal should be that creditors should bear the hazard for making bad loans that the debtor couldn’t pay.’ My answer to that is that creditors normally do pay a price for silly loans under normal bankruptcy law, though debtors have to prove they’ve made significant efforts to repay the loan and/or would have to endure unacceptable hardship if forced to repay. Thus the $64k question, which Hudson doesn’t solve, is this: exactly how much hardship should be imposed on debtors?”
Please try reading Hudson before condemning him. He talks about how creditors use predatory loans to ruin debtors, seize their lands, and throw people out of their homes. Creditors use predatory loans to force countries to go 100% neoliberal, with mass privatization and so on. Hudson talks about how some ancient rulers saw the catastrophe of this, and therefore had periodic debt jubilees.
I don’t know why you are unable to grasp any of this. Would it help if Hudson were condensed into Cliff’s Notes? Evidently not.
“while students who were able to carry and pay off their debts ”
ReplyDeleteThose would be the Science Degree students.... the Art Degree students have the financial trouble...
“The real hazard to every economy is the tendency for debts to grow beyond the ability of debtors to pay. ”
ReplyDeleteTo get a loan you have to exhibit an ability to pay ....
“but the IMF only has such money as IMF members give it, ”
ReplyDeleteRalph I think if you looked into it you would see that money center banks end up making the loans nd the imf takes a fee to guarantee them and the members then guarantee the imf...
So if the loans fail, then the nations may have to do fiscal to make the banks whole again and the “out of money!” morons in the govt ofc don’t want to do that because they are “out of money!”... would increase “the deficit!”, etc...
So the member nation govts always support the imf sanctions, etc as a first resort...
Or you could take the standard Art Degree explanation that it’s all “neoliberal conspiracy!” because they are too stupid to figure out the regulatory accounting process....
The free riders in the student loan case are the academics, administrators and professors that are ripping kids off in the first place, with dodgy certificates. False claims and snake oil about relative performance of graduates vs non-graduates that don't adjust for a variety of confounding factors are presented like social puff and magic that will enable them to get rich quick and be entitled to a life of luxury by studying for 4yrs. When the student loans come due, the academics don't stand by with a warranty and a guarantee for their claims they made when selling their crap-products and give do-overs, no they tell the debtors the solution is another degree.
ReplyDeleteA healthy labor market is always better solution, enable people to obtain education and lifelong learning as a right, but do it as a matter of civic necessity, from a place of honesty, and as a helping hand to people who want and need specific skills to move ahead. Taking punts on $100,000 for a women's studies or Byzantine history degree at an small institution where few connections to people in powerful places in the labor market will be made is far more risky than any other investment a person could make.
The question should be a systemic one as to why is the education system designed the way it is. What does society need from its population, what costs does society impose on its workers, and if people are not educated society bears increased costs and so what portion benefits the student and society in the first place. That should come before the discussion about the debt itself.
ReplyDeleteI'd guess society free rides off the improved behavior, lower crime, etc from an educated population. Maybe society should have a compulsory obligation to pay for some part of education for everyone, for convicts and people, I'd say the private institutions that take them should be given a waiver for higher default rates so public colleges can't free ride the system by excluding the most needy but most likely to default.
"The question should be a systemic one as to why is the education system designed the way it is."
ReplyDeleteWell it is currently arranged with two sides, the Art Degree method side and the Science Degree method side... compare the output of those two sides... I would assume on average the Science people have way less problems paying any student loans they may have taken from the govt...
Art Degree people have to figure out how to better get their people in paying jobs when they graduate...
Taylor Swift maybe thinking this way (I dont think she has an Art Degree):
https://twitter.com/MattBruenig/status/1065078548556328960
Systems developed by the silent and boomer generations worked for many years, I don't know why our legislators stopped modifying systems and improving them over time to adapt to changing inputs and requirements for outputs.
ReplyDeleteEven for the figurative "artists" in society who think that goofy dialectics give better answers can't be this completely ignorant.
Steve Keen’s original debt jubilee idea which as you rightly say would consist of handing out astronomic amounts of freshly created money to both debtors and creditors was bonkers. It would be wildly inflationary, as I pointed out shortly after he first proposed it. Ralph Musgrave [
ReplyDeleteNot if combined with deflationary measures such as abolishing all privileges for banks.
Reform and restitution for what is, in essence, legalized theft go hand-in-hand.
And btw Ralph, Keen said the fiat distribution would have to be combined with new credit restrictions so the idea was/is not "bonkers."
ReplyDeleteIn other words, with restrictions on new credit creation, the new fiat distribution could be metered to just compensate for the repayment of existing credit with no net change in the money supply. Hence no price inflation to be expected.
ReplyDelete“Even for the figurative "artists" in society who think that goofy dialectics give better answers can't be this completely ignorant”
ReplyDeleteThe systems have become exponentially more complex over the recent decades... no more faking it...
The current level of complexities have left them exposed...
ReplyDeleteTo get a loan you have to exhibit an ability to pay .... Franko
ReplyDeleteNo, not if:
1) The purpose of the creditor is to acquire the collateral, e.g. the real estate being bought.
and/or
2) The creditor has a good prospect of reselling the loan to investors before it goes bad.
95% or more of home loans are GSE.... you have to provide copies of pay stubs and employment verification to get one....
ReplyDeleteHave you ever in your life even took out a Conforming Mortgage?
I’ve done 5 including re-fis...
https://en.wikipedia.org/wiki/No_income,_no_asset
ReplyDeleteThose would be the Science Degree students.... the Art Degree students have the financial trouble...
ReplyDelete"Data" pulled out of your ass.
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