Debt Forgiveness

The reason debt forgiveness or write-downs is a big deal right now is because consumers can't pick up spending if they are buried under a mountain of debt.

The Occupy movement has not called, to my knowledge, specifically for debt forgiveness, but has loosely referred to it in their declaration and elsewhere.

I am in favor of debt forgiveness because of the fraudulent way in which the loans were originally made. Much of the debt for housing taken on by home-buyers and offered by banks was simply fraudulent. The loans were predicated on house prices that were way above trend because of the speculative housing bubble and banks made them despite being well aware they likely wouldn't be paid back. To be fair, it takes two to make a loan, and consumers probably shouldn't have taken on the enormous amount of debt that they did, but when it comes to culpability, I put more of the blame on the bankers because they knew the risks and told people they could make it work anyway.

They told people that they could afford the loans they were handing out and then repackaging and selling to other banks all to make a buck. The bubble finally burst, banks were bailed out, debtors were not. The ones committing fraud were bailed out and not tried for their criminal actions and the ones who fell subject to that fraud are still being held subject to that fraud. They are still required to pay back that debt.

Bankruptcy is an option, and I don't understand bankruptcy laws all that well, but I do know that if you declare bankruptcy your credit score tanks and you've likely sealed your financial fate. Why should people who took on debt because banks gave it to them fraudulently be forced to declare bankruptcy when the banks would have gone bankrupt if not for a federal bailout?

When the government bailed out the banks, they should have also bailed out the debtors by writing down their debt or forgiving it all together. This whole fiasco is a major Moral Hazard problem on both sides and is inherent in unstable Capitalist economies.

The major point is that that debt need not exist. It was created fraudulently and should just go away. Banks will be fine without it and people will be much better off without it. It really might be the only way forward. Debt really is our problem in the U.S., but it's not the government's debt, it's private households' debt.

Consumers can then start spending again, which will increase sales, and increase employment, which will start the cycle back upward. Banks will then be willing to lend to businesses and households again.

It appears conservatives are also considering this option.


In my opinion this shouldn't be a cyclical thing (that would only increase the moral hazard). It should be a one-time write down on housing debt. The bankers responsible should be tried criminally for fraud. No one should be evicted if the bank doesn't have the mortgage and no one should be evicted if the loan was made fraudulently.

From a CST perspective, I think a write-down is necessary out of justice and for the common good. Going forward, banks and households in general need more temperance and a feeling of responsibility both toward debt. That is, a debtor should take on debt responsibly and creditors should only give to debtors responsibly. In our Capitalist economy, that is far from the case. Households often want more than they can afford and banks aren't shy giving it to them if they know they can make a buck and get bailed out if they fail. There is little to no view toward the common good in all of this and is, I think, the major underlying cause of the financial crisis.

UPDATE: I should have said that CST doesn't say anything specific about debt forgiveness. What I'm saying is 'I believe that, given the fraudulent nature of the loans, justice demands some forgiveness and that CST would agree', but it is up to you to apply CST to this situation, or to the Church to teach us how to apply her teaching to this situation. I haven't seen anything from the Church on this particular topic; if you do, please send it to me!


UPDATE UPDATE: This is my reponse to comments because the computer that I am on won't let me comment.

Darwin--I am no expert on these matters, I take my info from my professors. One is a former regulator and expert in financial law and another is a monetary system expert who has studied the workings of the Fed and the Treasury extensively. You can consult the video here and the blog posts of Bill Black at neweconomicperspectives.blogspot.com.

Fr. Damien--I agree with you. I don't know that many student loans are/were fraudulent, but I do think a write down on student loans would be beneficial to the economy. The government is already actively involved in education 'investment' and investing in education is one of the best things you can do for the long run health of the economy. A big write down could be seen as an investment in our future, while at the same time improving things now by clearing consumer debt. I don't know what to do about students earning 'useless' (in terms of finding a job) degrees. That, to me, is unrelated to the fraud I am talking about.

Recovery largely rests on Debt Relief

No, not government debt, but private household debt. The enormous run-up in private debt that both contributed to the housing bubble and was an effect of the housing bubble is now holding us back from recovery. Households are trying to pay down debt through 'saving' more of their income, but in the aggregate are unable to because of unemployment and the 'paradox of thrift'.

In order for consumers to pick up spending again, they first need an income, and they second need reduced debts. Since the debt run-up was largely fraudulent (on both sides but I hold the creditors more culpable because of their understanding that the loans wouldn't be paid back and that the gov't would subsequently bail them out) I am in favor of some form of debt-forgiveness.

If we do not forgive large amounts of household debt, our recovery may never come. Job creation relies on sales which rely on consumer spending which relies on lower household debt which relies on income which relies on jobs. How can you enter the circle? The gov't can write down large amounts of debt and guarantee a job to all willing and able to work. These policies would, I think, ensure a swift recovery.

Read here for more on debt forgiveness.