One of the requirements of a system that allows private actors to own property is a mechanism for dealing with the excess accumulation of private debt. One such approach is debt forgiveness, an organized, standardized process by which society allows debtors to discharge what they owe. Other options include debtors' prisons and indentured servitude.
Cultures throughout time have understood the problems associated with over-indebtedness.
For example, the ancient Israelites left us texts in the Torah regarding all manner of what today we would call economics. From Leviticus 25 we have passages like:
10 Consecrate the fiftieth year and proclaim liberty throughout the land to all its inhabitants.
28 But if they do not acquire the means to repay, what was sold will remain in the possession of the buyer until the Year of Jubilee. It will be returned in the Jubilee, and they can then go back to their property.
39 “‘If any of your fellow Israelites become poor and sell themselves to you, do not make them work as slaves. 40 They are to be treated as hired workers or temporary residents among you; they are to work for you until the Year of Jubilee. 41 Then they and their children are to be released, and they will go back to their own clans and to the property of their ancestors.
54 “‘Even if someone is not redeemed in any of these ways, they and their children are to be released in the Year of Jubilee,
When you read through a chapter like that, you hear the nuts and bolts of a society addressing how things should work. We literally use that language today in our bankruptcy process: we talk about 'chapters' in the law. Like all aspects of political economy, there are no hard and fast rules when we discuss what should be the case.
US bankruptcy processes didn't develop out of some altruistic sense of protecting poor people or out of religious Fear of The Lord. They actually developed because American businessmen in industries like the railroads owed money to British financiers. But because of that, American policy was premised upon a core belief that actually reflects the Israelite philosophy quite directly. The American approach to debt is that creditors - the people lending money to the debtor - share a significant responsibility for fixing the situation. Debtors aren't deadbeats; they have significant rights and society benefits by respecting those rights.
Why do I say that?
One of the core assaults of the Reagan-Bush era targets this principle. More and more, our public policy is undermining the social cohesion created by standard bankruptcy processes. Let me highlight two key ways this is happening.
First, we are making it more difficult for debtors to discharge their debt.
In our society, we have been transferring risks from government to the individual. For example, employees are now expected to be able to 'hit the ground running'. Rather than publicly providing the education necessary to be a good citizen, we expect individuals to finance much of their education. Yet, instead of our laws being designed to protect citizens from being taken advantage of by lenders and employers, we have chosen to create public policy that makes it nearly impossible for someone who gets in over their head to get out of student loan debt. There's been a lot of talk about the student loan reforms, and they're certainly progress from the perspective of taxpayers. But they continue to enshrine the fundamental principle that to come of age in America today is basically to make a choice, at a very early age, between second-class citizen and debt-bondage. This makes all of us worse off as we restrict the life choices open to millions and millions of people.
Lest you feel I'm too biased toward my fellow millennials, it's not just student loan debt. The various financial crooks in our system literally caused an economic apocalypse. Don't ask me; listen to the fearmongering of the past few years as wealthy interests have demanded public dollars, Or Else. But guess what? We know the answers to solving the ongoing mortgage mess and reducing excessive credit card usage. It's to clean up the bad debt through tools like principal modifications and restructuring credit card balances in bankruptcy court. Why can't judges do that as much as they should be able to? Because we changed our laws five years ago to make it much harder for people to file for bankruptcy!
Second, bankruptcy is being portrayed as threatening the economy rather than saving it.
We literally have politicians today talking about individual firms as if they represent the industry in which they operate - or even the country itself. We have phrases like 'Too Big To Fail' and 'Too Interconnected To Fail'. Well, any entity that big is Too Big To Exist. Allowing the existence of firms that cannot be put through a liquidation or reorganization under corporate bankruptcy law is a direct attack on that law. The overarching societal benefit of bankruptcy processes is to provide a threat of sufficient size such that the various parties involved work out agreements on their own wherever possible. The public provides order via an orderly bankruptcy process, not by giving public dollars to private actors.
The in-vogue commentary right now, for example, is to talk about GM in the context of the 'auto bailouts'. What I would hope comes across is that GM's bankruptcy reorganization is what 'saved' the company. Bankruptcy doesn't threaten the economy; it's absolutely essential for economic well-being. Look at what GM did: they closed plants, shed workers, ended dealer relationships, ceased whole product lines, and otherwise downsized to a small enough company to be viable. We shouldn't be lending billions and billions of dollars to failed management teams, regardless of the industry in which they operate. We should be putting insolvent firms through planned, orderly, responsible bankruptcy proceedings. To the extent public outlays come into play, those should go to social insurance programs and investments in the public commons. We don't need more cars and trucks; we need more trains and wind turbines. GM's bankruptcy reorganization directly recognizes that reality - there are fewer workers making fewer cars today than two or three years ago at the 'old' GM.
Like GM, GMAC, Chrysler, Chrysler Financial, and various suppliers, the government erred with our major financial firms in giving them billions upon billions of public dollars. But the financial bailouts are even worse because those firms haven't been put through bankruptcy. This haphazardness, whereby we keep what many have termed 'zombie institutions' staggering through life on an IV drip from the public, weakens our financial system and the broader economy. What we need to do is what we did to Enron, and WorldCom, and, eventually, GM.
We need to net out the debts in our society. Whether you call it forgiveness, or jubilee, or just a fresh start, we have benefited greatly as a society for having these mechanisms in place in the past. It's past time we make broader usage of bankruptcy moving forward.