Cancelling debt

Tweet A week or so ago, Plaid Wrecsam highlighted the campaign by the ‘Occupy’ movement to buy up, and then cancel, debt.  As a result of the uncontrolled boom in lending which contributed so much to the financial crisis, lenders have been parcelling up debts and selling them on, often at a huge discount on ‘book’ value.

The idea of buying up debt at 10% of its nominal value and then simply cancelling it sounds revolutionary at first hearing, and there are those who would see it as threatening the very foundations of our economy.  But it isn’t actually as innovative or revolutionary as it sounds – and it might, in reality, be a way of perpetuating rather than undermining our current capitalist system.

Lenders willing to sell on debts at a mere 10% of their nominal value are, in effect, writing off 90% of the asset.  It is, from their perspective, simply recognising the reality that much of the debt is, in practice, irrecoverable.  The new organisations buying the debts don’t really expect to collect all the cash and make a 900% profit either.  They’re expecting to get back more than they paid, of course, but they probably don’t really expect to get back more than around 15-20% of the nominal value – and some of them will pursue fairly aggressive recovery strategies to hit even that level.  Both sides of this commercial transaction are simply taking a rational view about how much they can get back, when, and at what cost.

So, if a non-commercial organisation such as Occupy buys the debt and cancels it, they’re really only writing off the 10% that hasn’t already been written off.  It doesn’t feel that way to the debtors, of course.  Most of them probably never fully understood that their ability to repay (collectively, if not individually) had been seriously discounted by their creditors, who had already given up hope of ever seeing 90% of their cash again.

The first way that cancellation of debt helps rather than hinders economic activity is that it widens the choice of economic stimuli available to policy makers.  The problem with non-capital stimuli (such as reductions in VAT or income tax) is that indebted people may simply use the extra cash in hand to pay down debt.  The cash goes straight back to the banks, and does little to stimulate the economy.  But freed of debt, people are more likely to spend.

Debt cancellation isn’t a particularly new idea either – it’s only in the comparatively recent past that the idea has become so commonplace that debt is inviolable and eternal.

5000 years ago, Mesopotamian rulers regularly granted amnesties which cancelled all personal (though not commercial) debt.  The clay tablets on which debt was recorded would be broken, debt slaves would be freed, and land and property seized in pursuit of debt would be returned to their previous owners.

2012 is the year of a royal jubilee, but I haven’t seen much reference to the origins of the word.  It’s a biblical term, I believe (although it may be ancient Egyptian according to some), and refers to the time when slaves were freed, and sins (and debt) pardoned.  We haven’t seen much of that sort of jubilee this year, though.

Now those ancient societies didn’t cancel debt because the lenders suddenly developed a social conscience and started to feel bad about their exploitative ways.  They did so because the increasing concentration of wealth and the subsequent rise of the dispossessed threatened the stability and cohesion of their societies.  Their economic system, in short, needed to be rebalanced from time to time.

There’s a parallel of sorts with the situation today.  And that’s the second reason why debt cancellation on a large scale might actually be in the best long term interests of the capitalists, even if they don’t immediately understand that.  We don’t always learn a great deal from history.

The Occupy initiative is something to welcome as a starting point for a wider programme of debt cancellation both nationally and internationally.  But it is almost certainly not the sort of threat to the established order which some perceive it to be.