We have all been brought up with the idea that we must pay our debts, that failure to pay back a debt is morally wrong. Since the 2008 financial crisis, banks have argued that writing down debt, particularly reducing principal on mortgages constitutes “moral hazard,” that somehow debtors’ failure to pay the full principal and interest on a loan is morally indefensible. I, on the other hand, would argue that in many circumstances debt refusal is a moral imperative, that in such circumstances it is wrong to pay a debt. Those circumstances include the following: when the terms of the debt are understood by the lender but not by the borrower; when paying back the debt will cause serious harm to those who were not directly a party to the debt; when paying back the debt will render the debtor unable to support those dependent on him or her; when the interest rate is usurious or the terms of payment unnecessarily difficult; when the debt threatens the viability of a sovereign economy; or when the debt threatens to reduce the debtor to virtual slavery.
When most of us think of odious or predatory debt, we generally think of the shadow lending system of payday lenders and similar businesses. Victims of these shadowy lenders are the so-called unbanked or underbanked. According to a 2009 survey by the FDIC, 25.6% or about 30 million American households have no bank account or have a bank account but are nevertheless compelled to use such alternative financial services as payday loans, check-cashing services, and tax refund loans. As one might expect in racially divided America, minorities are over-represented among the unbanked and underbanked. The FDIC’s survey found that 54% of African American households, 43% of Hispanic households, and 44.5% of native American households are unbanked or underbanked. Such services as payday loans, check-cashing services, and tax refund loans come with steep fees and high interest rates. Interest for some payday loans runs over 600% apr while upfront fees can run as much as 25%.
A head of head of household who is compelled to borrow from a payday lender against a future paycheck in order to meet the household’s needs will obviously have less to meet those same needs from his or her next paycheck. Borrowing from alternative lending services in many cases leads to perpetual debt, a kind of debt servitude that bears comparison to the sharecropping systems of the South. Gary Rivlin has estimated that households making $30,000 or less annually pay an extra $2500 per year in extra debt service fees and interest. Such borrowers often have no choice but to borrow if they want to support their families. Not only does the increasing debt virtually enslave many borrowers, it clearly threatens the well-being, perhaps even the survival, of their dependents. It is quite costly to be poor in America! Clearly, such debts are morally repugnant. Their abrogation is a moral imperative.
The same can be said of the mortgages sold to unwitting homebuyers during the real estate bubble. The mortgage market became a giant Ponzi scheme. Banks and mortgage companies saw an opportunity to make enormous sums of money not from the interest on the mortgages but from re-selling them, often as part of elaborate derivatives. Because loan originators re-sold the mortgages, usually to larger banks, they had no interest in insuring that the loans would be paid off or even that the value of the property sold exceeded the amount of the loan. Mortgagers simply added their own lucrative sales fees and sold the mortgages to banks, which in turn packaged multiple mortgages, many of them sub-prime, into correlatized debt obligations and sold these securities to investors. Ratings agencies, who were paid by the banks selling the securities, often rated these packages of sub-prime mortgages AAA. No one in the entire chain, from builders to real estate sales agents, to lenders to big investment banks had any interest in holding costs down or insuring that housing prices were realistic. As a consequence, much residential real estate was grossly over-valued.
In retrospect, it appears that many of these mortgages were designed to fail. The banks and lenders had no interest in ensuring the loans would be paid back. Rather, the more mortgages failed, the more they could sell. The lenders sold variable rate sub-prime mortgages whose interest rates could be expected to increase markedly after two or three years. Though many of the mortgagees were poorly qualified, banks sold sub-prime mortgages to many others who had good credit and would have qualified for flat rate, low interest mortgages. For example, over forty percent of mortgages sold to African Americans with good credit were subprime mortgages, as were more than 35% percent of those sold to Hispanics (The Debt Resistors’ Operations Manual, a project of Strike Debt/Occupy Wall Street, 2012: 44). Anyone who has sat through multiple real estate closings with first time home buyers, as I have done with Habitat clients, knows how much difficulty they can have understanding even the most basic flat rate mortgages let alone complex variable rate mortgages.
The lenders, the banks, and the ratings agencies were all guilty of fraud on multiple levels. They defrauded home buyers by selling them mortgages they could not pay off. They defrauded investors by selling securities based on mortgages designed to fail and by rating sub-prime mortgages AAA. Then, they further defrauded investors by buying and selling credit default swaps, essentially insurance policies on the doomed correlatized debt obligations that would pay in the very likely event that the securities lost substantial value. That is comparable to a used car company’s selling a buyer a demonstrably unsafe car while simultaneously buying or selling another buyer a life insurance policy on the car buyer. Finally, some of the banks admitted to fraud when they illegally manipulated in their own interest the LIBOR, the interest rate on which the adjustments in mortgage rates were based. According to The Debt Resistors’ Operations Manual (48), as of 2012, over 11 million homeowners were underwater while as many as 9 million faced likely foreclosure and eviction. Such foreclosures invariably reduced the value of nearby homes, producing yet more underwater homeowners
Yet the big banks, in spite of paying billions of dollars in fines for having defrauded home buyers, in spite of having cost local communities hundreds of billions of dollars, and in spite of having collapsed the nation and the world’s economy, refuse to admit guilt and refuse to grant relief to the homebuyers they defrauded. They argue that to grant relief would be to invite “moral hazard,” by implying people do not have to pay their debts. Is this not some of the most blatant hypocrisy imaginable—criminal banks guilty of multiple kinds of fraud accusing others of being immoral?
The terms of much student debt, too, are morally questionable. As a society we have long preached that the way to success is a college education. Unfortunately, the federal government, in league with the giant quasi-governmental corporation Sallie Mae, has transformed that path to success into a path to servitude. Forty million people, 12.5% of the US population, owe a total of $1.2 trillion in student debt, amounting to nearly $30,000 per person. Interest rates on these loans are far higher than on most other loans—ranging from about 6% up to 10%. And unlike any other category of loan, student loans do not allow the protection of bankruptcy. Penalties for default include garnishment of wages, Social Security benefits, and even disability payments. Perhaps most outrageous of all, we taxpayers actually earned $51 billion from student loan interest in 2013 (Andrew Ross, Creditocracy and the Case for Debt Refusal, New York: OR Books, 2013, 104, 108, 111, 112). Because its terms are far more egregious than those of other forms of debt, because it traps people in near servitude, and because it threatens the vitality of our economy, student loan debt is morally repugnant and should be abrogated.
Like many of the rest of us, state and local governments have had increasing difficulty paying debts and providing vital services for their people, a difficulty seriously exacerbated by the 2007-08 financial crisis caused by the same big banks that now insist we all pay what we owe them. Local governments felt compelled to borrow in order to pay their liabilities even when they were unable to borrow at favorable rates. As a result, governments such as Stockton, CA, Jefferson County (greater Birmingham), AL, and most recently, Detroit, MI, have gone into bankruptcy. Many other local governments face looming debt crises, and as far as the banks are concerned, all of those governments’ taxpayers, whether they are personally in debt or not, are responsible for those debts (Ross, 42). In June 2012, a group of large Wall Street investment banks, including JP Morgan Chase, Bank of America, and Wells Fargo, were found guilty in US vs. Carillo of fraudulently rigging bids on municipal bond auctions, a market worth $3.7 trillion.
The fines these banks had to pay represented only a fraction of the sums they accumulated through their fraudulent behavior and the suits did not remit the debts of victimized municipalities. While public officials who negotiated the loans for Jefferson County, AL are now in jail for accepting bribes to sign contracts indebting the county, not a single bank executive has faced prison or even personally paid a fine. Yet the loans, though negotiated down somewhat through bankruptcy, remain on the books, and the people of Jefferson County and other communities continue to pay on them, depriving them of much-needed services and increasing the costs of other services. Because they were fraudulently negotiated, these debts are clearly odious and should have been repudiated and written off altogether as, I believe, should those of Detroit.
Total US debt in the 3rd quarter of 2013, including household debt, non-financial business debt, and state and local government debt, but not federal debt, was estimated to be $30 trillion, of which roughly $13 trillion was household debt, $13 trillion business debt, and $3 trillion state and local government debt. That $30 trillion is about twice the country’s gross domestic product for 2012; the household total alone nearly equals gross domestic product. So great is the debt load of many households that it is virtually impossible for them both to pay off the debt and to sustain themselves. If, as the federal reserve estimated, the total debt load of US households in 2013 was roughly $13 trillion and the number of households was roughly 122,000,000,
then each household’s share is $106,550. More and more families find that they cannot sustain such debt loads without going into permanent debt. According to Barbara Hodgson Brown, debt has become so extensive and burdensome that even for those of us who personally owe nothing, over 30% of our spending goes to pay interest on debt (Barbara Hodgson Brown, The Public Bank Solution, Kindle location 246).
So are the big banks who want us to pay all we owe in spite of their own fraud the wondrous job creators their allies in Congress claim? They are not! Rather than investing in the productive, “real” economy of goods and services, investment banks, hedge funds, and other large financial corporations invest heavily in non-productive, lightly taxed assets such as real estate, insurance, and elaborate speculative instruments. A productive business’s payments for labor, raw materials, and items for resale have a multiplier effect as they are spent in the “real” economy for goods and services, thereby contributing to growth. Multi-national banks’ investments, often very heavily leveraged and highly speculative, rarely if ever find their way into the “real” economy. According to Paul Buchheit: “The very rich generally don’t risk their money in job-creating startup businesses. Over 90% of the assets owned by millionaires are held in a combination of low-risk investments (bonds and cash), the stock market, and real estate.”
In addition, US individuals and corporations have more than $1 trillion dollars in untaxed offshore profits. On its web site, the Cayman Islands boasts that it alone holds over $1 trillion in US offshore, tax-free accounts . Worldwide estimates of the total amount deposited in tax-free offshore accounts range as high as $21-32 trillion. So rather than building our economy, creating jobs, and investing in innovations, the wealthy to whom we owe debts are simply hoarding massive amounts of debt payments offshore.
The actual “job creators” are not the big lenders, but the much less risk-averse entrepreneurs. However, the average entrepreneur is 26, and many educated 26-year-old potential “job creators” are heavily in debt due to student loans. According to Thom Hartmann, “Over the past decade, the average debt for a 25-year-old has risen a staggering 91 percent, and most of that debt is from student loans.” If these 25-26 year olds are burdened with debt, where will they find the funds to start businesses? No wonder the percentage of small businesses in the US economy is among the smallest in the developed world. According to Hartmann, “the firm entry and exit rates (essentially the creation and death of businesses in America)” was cut in half between 1978 and 2011. So the burden of debt affects not only the debtors themselves, but our economy as a whole by reducing entrepreneurship, innovation, and employment.
I would argue, then, that our massive debt load cannot be repaid without destroying our economy and that, under such circumstances, it is an immoral act to repay such loans. In particular, as Matthew Ross has argued in Creditocracy (pp. 24, 25 Ross’ book is available as a pdf from OR books), it is immoral to pay on a debt when doing so interferes with a family’s ability to sustain itself or with a government’s ability to provide vital services such as education and health care. It is also immoral to pay a debt when that debt reduces a person or group of people to debt peonage or when it threatens to collapse an economy.
The idea that debts must take priority over all other obligations simply is not normative to the Judeo-Christian tradition. The Old Testament Mosaic law forbids charging interest to those who must borrow to sustain themselves (Lev 25:36-37) and requires that debts be cancelled after seven years (Deut 15:1). The prophets denounced the loading of people with debts. In the New Testament, Jesus tells his followers to pray “forgive us our debts as we forgive our debtors.” While Biblical literalists choose not to interpret this passage literally, there is no doubt that for both Jesus and his contemporaries it called to mind the seventh-year debt jubilee of Deuteronomy 15. And Jesus repeatedly uses debt cancellation as a concrete representation of forgiveness. In Luke 6:34-35, he says that we should lend to the poor not only without charging interest but without expecting repayment.
The early church gave and shared rather than lending (See Acts 2:44-47 and Acts 4:32-35), and the medieval church forbade burdensome charging of interest. John Calvin, often thought to have been tolerant if not downright approving of usury, actually attacks it in his “Letter of Advice on Usury”: “the majority of our lending should be to the poor with no hope of return.” He goes on to argue that “usury almost always travels with two inseparable companions: tyrannical cruelty and the art of deception”.
For both moral and pragmatic reasons, then, we need a powerful movement to abrogate debt. If only a fifth of the 70 million or more US citizens enslaved by odious debt were simultaneously to refuse to pay, enforcement of debt payment would be nearly impossible, and lenders might well be forced to abrogate or at least write down debt. Ultimately, we have two choices: we can write down or simply repudiate debts that have become too burdensome or that represent an inordinate drain on productive resources; or we can give in to the professional gamblers and parasites we so euphemistically call investors and see our economy eviscerated to the point where we have no money to invest in labor, in maintaining infrastructure and equipment, in research or innovation.