Household debt amnesty?
It’s Saturday morning, which means it’s time to conduct a thoroughly absurd thought experiment just for the sake of argument. Today I want to consider the idea of a widespread household debt amnesty: everyone who owes money on their credit cards and payday loans and also perhaps mortgage will be forgiven their debt (although mortgages would have to be rewritten rather than forgiven). What would happen next?
I was discussing this very question, and David Graeber’s book (still not finished- it’s long!) with a friend of mine, specifically how Graeber cites ancient Sumerian civilization as having periodically enacted household debt amnesties to avoid the collapse of their cities (specifically to avoid the debtors from fleeing the cities to avoid their debt problems).
One thing that I realized in that conversation is that, whereas Graeber mentions that it was historically an amnesty for household debt only, so didn’t involve commercial debt between companies and merchants, what we’ve seen in this country in the past 3 years is something like the opposite of that concept. Our (large financial) companies have been granted special considerations while the people who had made the mistake of entering contracts with them have not. And the so-called mortgage modification process has not been sufficiently widespread yet to really consider it an example of this. There is an excellent article here which makes this point, although not in this context.
The objection my friend had to the idea of enacting such an amnesty was that it would be pouring good money after bad; he’s European so he cited the example of Greece, and how the more money Greece gets the more money they spend, so it’s an impossible situation.
Actually I think this is an appealing analogy to make, but it’s a false one. Greece has a large-scale system in place, and giving them money without changing that system clearly isn’t going to solve any long term problems- it just kicks the can down the road.
However, it’s really different with consumer debt (credit cards etc.). Namely, the “system” that a given consumer enters into is a simple relationship (contract) with the credit card company in question. If the debt is forgiven, then the credit card company doesn’t have any obligation to extend more credit to that person. And in many cases, it wouldn’t.
I think the consequences of a household debt amnesty would be something along these lines:
- People who were previously in debt would have some cash on hand and would be able to spend it on consumer stuff (that they can actually afford with no credit) instead of spending it all on minimum payments to old credit card debt
- Credit card companies, burned from their losses, wouldn’t give them new credit cards, or would change the payment arrangements to make sure they got their money back faster
- Since they have no credit, those people who essentially be living in a cash-dominated society. This may actually be a good thing, because it would force people to budget in real time.
- Eventually people could rebuild a credit score over time if they decided to try credit again
In other words, that’s really not so bad and would get money flowing through the system again, which might help with our current recession.
Of course not everyone would be happy about a household debt amnesty. In particular the people who aren’t debtors would feel pretty burned that they’ve been careful (or lucky) with their money and aren’t getting a free ride. And the credit card companies would have to eat a lot of loss. On the other hand they’re going to eat (and have eaten) a lot of loss already, and the slowness of this process is killing the economy.
Is there a way we could set it up to make this work? Even if we ignore the political obstacles?