Surely, You Must Pay Your Debts!

Not necessarily, and don’t call me Shirley!

Below is a link to a fairly long review by journalist Robert Kuttner of a book called Debt: The First 5,000 Years. I’ll summarize:

People, especially poor people, have been borrowing from other people, especially rich people, for thousands of years.

As long as people have borrowed, lenders (not all of them, but some of them) have accepted partial payment, especially in difficult economic times. Sometimes it makes economic sense for lenders to suffer a loss, if that’s what’s required to make the economy as a whole (and possibly the lenders themselves) more prosperous. It isn’t mentioned in the review, but Babylonian kinds periodically canceled debts so their wealthy subjects didn’t end up owning all the land. 

The modern form of bankruptcy was invented 300 years ago in England. The idea was that both creditors and debtors would be better off if debtors were allowed to start over, repaying what they could instead of wasting away in debtor’s prison.

Our current laws are tilted in favor of banks and the people who run corporations. Corporations are allowed to declare bankruptcy, sometimes more than once. Corporate officers generally remain in control of their bankrupt companies. On the other hand, countries like Greece can’t declare bankruptcy, although this has been proposed. Homeowners can’t use bankruptcy to deal with their mortgages. Students can’t even refinance their student loans at lower rates. In Kuttner’s words: “The obligations of a student loan follow a borrower to the grave”.

The Germans use the same word for “debt” and “guilt” (Schuld). They’re strongly in favor of other countries paying everything they owe, but seem to have forgotten that, after World War II, the Allies forgave almost all of Germany’s debts and allowed the Germans to postpone their remaining payments for 50 years, helping Germany rebuild and eventually become a creditor to other nations: “Germany, whose debt-to-GDP ratio in 1939 was [a whopping] 675 percent, had a debt load of about 12 percent in the early 1950s—far less than that of the victorious Allies”.

Most of us believe there is a moral aspect to paying our debts, but that’s not the way it’s generally thought of in the business world:

The double standard in debt relief that favored large merchants, present at the creation of bankruptcy law in 1706, persists today in many different forms. It gets surprisingly little attention in the debt debates. Despite the tacit assumption that “surely one has to pay one’s debts,” the evasion of repayment is both widespread and selective. Corporate executives routinely walk away from their debts via Chapter 11 of the national bankruptcy law when that seems expedient. Morality scarcely enters the conversation—this is strictly business.

It’s an excellent, eye-opening article. It even includes some recommendations for changing how various kinds of debt are handled today.

http://www.nybooks.com/articles/archives/2013/may/09/debt-we-shouldnt-pay/?page=1

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