Thursday, May 28, 2020

We’ll Need Mass Debt Forgiveness to Recover From the Coronavirus — Eric Levitz

MMT friendly.

Favorite lines:
Money is created in one of two ways: by the government making payments (Uncle Sam writes you a check, the bank then credits that to your account) or the bank extending a loan, in which case the bank credits money to your account against a contract saying you’re going to pay it back. The government extinguishes money by taking in taxes; the bank extinguishes it by taking in loan repayments.
The question of how much money is created is determined by how much activity the public and private sectors are willing to animate. How many loans does the banking sector wish to extend? How much spending will the public sector approve?
Regarding the title, I would not say debt "forgiveness" but "restructuring." Only debts that cannot be repaid need to be discharged. This would reduce or prevent Chapter 7 bankruptcies and evictions, that can cascade and produce a domino effect. Other debts can be restructured, which is what Chapter 11 is about. This would apply to essential production and services, for example.

The trick is to head off systemic risk that results in a deep recession or even a debt-deflationary depression.

This could be avoid by an economic snap-back, a so-called V-shaped contraction. However, absent an quite recovery, debt can become a problem.

The Intelligencer
We’ll Need Mass Debt Forgiveness to Recover From the Coronavirus
Eric Levitz


Andrew Anderson said...

Steve Keen's "A Modern Jubilee" is much more just since the current government-privileged banking model cheats non-debtors too.

And if you're going to give all those who have a home mortgage their houses then logically all renters should be given their apartments too.

Ralph Musgrave said...

Debt jubiless are a nonsense. First, Keen's jubilee system (or at least some peoples' jubilee system) involves debtors being forgive, while so as to make sure creditors do not lose out, they are compensated by govt printing loads of money and giving it to creditors. Hyperinflation here we come.

Second, if, as an alternative, creditors are simply robbed, then creditors will charge about three times the rate of interest in future so as to compensate themselves for being robbed. Quite what the advantage of that is for debtors is a mystery.

Andrew Anderson said...

Hyperinflation here we come.

Not necessarily - especially if the ability of the banks to create new deposits is reigned in.

Steve Keen would do it by regulation; I would do it by de-privileging the banks completely so as to make new liability creation (new deposits) as dangerous as it should be.

Andrew Anderson said...

As for interest rates, they can be lowered as desired by:
1) Negative interest on large and non-individual citizen fiat accounts.
2) equal fiat distributions to all citizens (Citizen's Dividend).
3) accounts for all citizens (at least) at the Central Bnak or Treasury so individual citizens can be shielded from negative interest to a reasonable account limit.