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Forgive Us Our Debts?

The war between lenders and borrowers.

May 28, 2012, Vol. 17, No. 35 • By IRWIN M. STELZER
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Debtors of the world, unite—you have nothing to lose but your IOUs!

Photo of French protesters of the austerity measures

L’austérité? Mais non! Brussels in December 2011.


That seems to be what the Greeks are discovering—that they have less to lose by default, with all of its consequences, than by trying to be Germans.

One of the most surprising aspects of the financial crises being played out around the world is the failure of policymakers to concede perhaps the most important underlying fact: This is a war by creditors, in control of the institutions of power, to saddle debtors with the cost of the errors in which both borrowers and lenders are complicit. It is in its way very much like some past debtor-creditor brawls: farmers vs. mortgage lenders, hard money financiers vs. those who wanted to avoid crucifying mankind on a cross of gold, Latin American dictators vs. foreign bankers.

Start with Europe. In Greece, Spain, Ireland, Portugal, France, the Netherlands, and Belgium—that may prove to be only a partial list when all the numbers are in—citizens are being asked to tighten their belts, to tolerate austerity-induced joblessness that has driven economies into recession and eurozone unemployment rates into double digits. They are being asked to do without some of the social services to which they have grown accustomed, some of those services the frosting on an already-rich welfare cake, some of them essential to a minimal standard of living for the poor. They are being asked to pay higher taxes on their incomes, property, and wealth at a time when their real incomes are declining.

Why? To prevent the bankruptcy of some sovereign governments, a bankruptcy that would impose losses on the owners of European bank stocks and would threaten the euro, a currency based on the shaky assumption that fiscal union is not a necessary concomitant of monetary union. The end of the euro, of course, would mean an increase in joblessness—among the bureaucrats who by the thousands inhabit the best flats and restaurants of Brussels, and earn salaries and benefits that are the envy of national politicians. The Eurocrats contend even now that they need an inflation-busting increase in their budget, financed if necessary by higher taxes on residents of the European Union and on the financial services industry, primarily in Britain, which had the good sense to hang onto the pound sterling rather than enter the eurozone.

On to the United States. Some debtors are losing their homes. Many of them were imprudent to take on mortgage debt they could not possibly repay, but some were wiped out because the economic downturn, for which they were in no way responsible, destroyed long-held jobs or drove down property values. These debtors are the collateral damage of macro-economic disasters unleashed by -others. The lenders, institutions presumably schooled in the fine art of risk management, and armed with information from staffs of economists and the fabled quants, were not merely innocent victims of the debt crisis. They made loans with their eyes wide open, unless blinded by the thought that they were too big to fail, or that they could simultaneously make bad loans and sell them to trusting clients. The borrowers lost homes and equity, the lenders were bailed out, and although shareholders in lending institutions did not escape unscathed, many of the bankers to whom they entrusted the management of their wealth did. Compare the plight of an evicted family with the banker fighting a rearguard action to prevent shareholders from reducing his bonus by the odd million or two. Or the prudent saver who now finds there is an almost zero return on his savings—virtuously accumulated by deferring gratification—so that the Fed can keep rates low enough to boost bank profits.

On to the biggest creditor of all, China, at risk should the United States decide to (dis)honor its obligations by running the printing presses and otherwise reducing the value of the dollars being used for repayment to a fraction of those it borrowed. China received those dollars in return for goods it sold to America, and invested them in the IOUs of the U.S. government rather than allowing its currency to appreciate and opening its markets to made-in-America stuff. And it is using the wealth, much of it amassed by stealing intellectual property, to build a military that threatens American security and economic interests around the globe. Although some of China’s gains from trade would be reduced by depreciation of the dollar, its claim to sympathy is somewhat weakened by the fact that a good portion of those gains were ill-gotten.

I exaggerate, but only to raise an important question. Is now the time to follow the biblical injunction that debtors be released from debt every seventh year? The answer is “no,” lest credit become unavailable except in the form of short-term loans. But not because of moral hazard, the valid concept misused by creditors and their supporters.

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