Debt relief for whom? – The D&S Blog
Two new books deal with debt at opposite ends of the financial scale. In The case of a debt jubilee in the United States, Richard Vague offers a practical way to cancel the crushing debt of the middle class. In The lords of easy moneyChristopher Leonard traces How the Federal Reserve Broke the American Economy because it protected the big banks which had contracted unpayable debts.
First part : The case of a debt jubilee
I asked my physical therapist, Patrick, 29, what he would do if he didn’t have heavy training debt. “First, I would buy a house,” he says. “So maybe invest. Maybe buy houses to repair. Maybe… As it is, I’m very careful. I put aside some money each month. He was shocked when I told him that 65 years ago my husband went to public universities up to a doctorate without paying tuition. But Patrick is lucky. He earns a living wage in a good job that he loves.
The student debt burden has risen from around $481 billion in 2006 to $1,476 billion in 2022. It cripples the lives of many middle classes and drags down the economy. Some students received worthless degrees from sleazy, for-profit colleges. Since more than 90% of this debt is owed to the federal government, Bernie Sanders called on President Biden to simply erase it.
As Richard Vague explains in The case of a debt jubilee, debt has been essential to economic exchanges since the beginning of civilization. Yet debt inevitably reaches destructive levels. In the ancient Middle East, kings periodically proclaimed a debt jubilee for small debtors. Small farmers have reclaimed their land and their children have returned from debt bondage. In this way, the kings both reduced the debt on the economy and reasserted royal power over wealthy merchants and nobility.
In 2021, total private debt in the United States was $39 trillion and public debt was $30 trillion, compared to GDP of $23 trillion. Private debt has increased inexorably since 1950, rising from 50% of GDP at the time to 165% in 2021, slightly down from its peak in 2008. It exceeds public debt, which has hovered around 100% after 2008 until the peak of the Covid epidemic at 129%. (See
Wave Stats for the United States.) Student debt is currently in the public eye. But the mortgage debt is much larger. After peaking in the 2008 crisis, it is rapidly rising to over $11 trillion in 2021. The medical debt is smaller, about $140 billion, but is changing the lives of millions of American families. The Covid outbreak has left several million families and small businesses desperately behind on mortgage and rent payments.
Vague offers practical and politically feasible ways to reduce the debt burden.
Canceling student debt creates “moral hazard”. That is to say, the possibility of forgiveness can encourage people to go into more debt. This was the logic behind a 1976 federal law prohibiting student debt bankruptcy. General forgiveness, as proposed by Bernie Sanders, is unfair and politically bad news. More than half of student debt is owed by people, like my PT Patrick, who have advanced degrees. A third of student debt is owed by people in the top 20% of incomes. To cancel their debt at the same time as the debt of the poor victims of the diploma mill is to spend public money to help the relatively well-to-do. This would produce a legitimate howl from families who have saved money for education. It would give Republicans another club to beat Democrats for favoring educated coastal elites.
Fortunately, as Vague points out, there is already a federal program that could wipe out student debt without controversy. Under the Public Service Loan Forgiveness Program, students who engage in designated public service work and make 120 consecutive loan payments can have their debt balance forgiven. So far, the government has applied the criteria so narrowly that few students qualify. Expand this program broadly, Vague says, to enable students to “pay off” their debt in many forms of service, such as Peace Corps, teaching or providing health care in underserved areas, or other forms of community service. . Professionals like Patrick could work for a few years in a rural clinic. (Civil service loan cancellations won’t solve the causes of skyrocketing student debt: State and federal tax cuts have cut funding for public colleges. At the same time, the federal government’s expanded student loan program encouraged private colleges to raise tuition and allowed for-profit colleges to prey on unwary youth.)
The collapse of the housing bubble in 2008 left ten million households “under water”, meaning they owed more on mortgages than their homes were worth. The federal government offered them a limited interest rate reduction program, but no mortgage debt writedown. It’s understandable why. First, due to the volume of bad debts, lenders were grossly over-leveraged, that is, debt was many times greater than equity. Forcing them to write down the mortgages (taking a simultaneous bite out of assets and equity) would have revealed them to be insolvent (having negative equity) and likely to collapse. Second, just as with student debt, writing homeowners’ underwater mortgages creates moral hazard, equity, and political issues. Moral hazard in that the prospect of mortgage relief could encourage people to take on more debt. Fairness and politics insofar as a depreciation seems unfair to homeowners who have always met their mortgage payments and/or who did not foolishly buy overpriced homes at the height of the bubble. In 2010, the Tea Party fought against the injustice of mortgage interest relief.
Vague cleverly squares this circle as follows: at the request of a homeowner, the banks would write a mortgage on the market and also reduce the monthly payments. But as a special crisis waiver, banks would be allowed to amortize the loss over thirty years, instead of taking it all at once. And the owner would agree to give the bank a share of the increased value of the house when it finally sold. This legal device offers a win-win deal for landlords and banks, without the appearance of a freebie for the idiots and the unworthy. This would have allowed many families to remain in their homes. As a new real estate bubble takes shape, this may soon be necessary again. (The 30-year amortization scheme was successfully used in 1983 to allow major banks to write off debts owed by Latin American countries.)
A large survey of 2015 found that a quarter of 18-64 year olds said they had trouble paying their medical bills, with little difference between those with and without insurance. About 2% of them, which is about one million people nationwide, filed for bankruptcy that year. Health care debt should be easier to forgive. There is no moral hazard problem because people don’t get sick or injured on purpose. The best solution, Vague writes, would be single-payer health insurance. But until that’s politically feasible, he offers means-tested relief: People with household incomes below $85,000 could apply to the federal government for repayment of debt incurred for major expense categories. medical conditions, including diabetes, heart disease and cancer.
In 2005, Congress enacted a tough new bankruptcy law on the assumption that reckless spenders were abusing bankruptcy. But it turned out that most people file for bankruptcy out of desperation after life’s disasters, including big medical bills, job loss, or small business bankruptcy. Vague proposes a number of major bankruptcy law reforms. These include allowing landlords to modify their mortgages, tenants to avoid eviction if they continue to pay rent, car owners to keep their car by paying off the value over time, and individuals repay student loans like other consumer debt.
Vague estimates that these reforms could result in up to $1.5 trillion in debt relief, mostly for households. In addition, he proposes to modify the income tax code to make it less favorable to corporate debt.
Wave finished the book before the current price spike. The Federal Reserve is now struggling to raise interest rates from near zero. Even if Americans step up their borrowing, higher rates will increase interest payments on the debt. Student loan rates are the highest in many years. Higher rates can also trigger a sharp decline in the value of assets, including stocks, bonds and real estate. A debt jubilee couldn’t be more urgent.