Kuttner: Debt politics pits the claims of the past against the productive potential of the future

This seems to be a theme day at Casa GP, more about the economy than one meal should contain.

At least it keeps our minds off that flashlight of truth pointed at Anthony Weiner and his focus on the serial corrections of the deeply conflicted Justice Clarence Thomas.

Robert Kuttner has a terrific piece in The American Prospect, a one-page column that's both a fast read and wonderfully enlightening (pdf).

The gist is this: One way to think about the current problem, with its monster overhang of consumer debt smothering consumer demand, is to decide who the political system is going to protect, creditors or debtors.

• Protecting creditors protects the past. It attempts to resolve all past debts (with full repayment) before the economy can be allowed to move forward. In other words, everyone waits until creditors are made whole.


• Protecting debtors (with bankruptcy, so their debts can be cleared) hastens the day when they can start being productive again and contribute to the health of the economy.

It's possible to do both to some degree, but you can't do all of the first without doing none of the second.

And creditors (rentiers, in Krugman's phrase) are in charge. Here's just a taste of Kuttner (my emphasis):

Economic history is filled with bouts of financial euphoria followed by painful mornings after. When nations awake saddled with debts incurred to finance wars, episodes of failed speculation, or grand projects that haven’t paid off, they have two choices. Either the creditor class prevails at the expense of everyone else, or governments find ways to reduce the debt burden so that the productive power of the economy can recover.

This is class war, but with a difference:

The creditor class views anything less than full debt repayment as the collapse of economic civilization. In fact, however, debts are often not paid in full. In the 20th century, speculators lost fortunes as dozens of nations defaulted on debts. Several 19th-century U.S. states and municipalities defaulted. Losers in wars and revolutions seldom pay debts. (Those czarist bonds have no value except on eBay.) The Brady Plan of the late 1980s paid bondholders of defaulting Third World debtors at about 70 cents on the dollar so that economic growth could resume.

Sometimes, debts simply cannot be paid. That’s why debtors’ prison was a ruinous idea (except as a deterrent). The real issue is how to restructure debt when it becomes impossible to repay. This is not just a struggle between haves and have-nots but between the claims of the past and the potential of the future.

It's a really smart article, and as I said, a fast read. He contrasts the treatment of debt after WWI with the treatment of debt following WWII. Big difference, both in action and results. The quality of mercy indeed blesseth him that gives and him that takes. The post-Versailles French, wanting full reparations, bought dearly what they took.

The lesson could not be more current:

The banker-afflicted European Union is punishing Greece rather than finding a way to let it grow. In the United States, relief is denied to underwater homeowners because debt contracts are sacred, even as the policy prolongs the agony. Everywhere, budget austerity is advertised as the road to growth— though it denies the economy its productive potential.

We're headed toward the post-WWI Versailles solution. By the pricking of my thumbs...

GP