Thank you for your spirited response, Tom. You raise some interesting points about the moral hazards of debt cancellations, all of them against debt cancellation.
But the one thing that seems to be missing from the conversation is the collateral, or whether or not the lenders actually expect to get paid back. Don’t forget, those banks are creating money. They’re not actually lending money that was earned by someone else. What a fine spigot to be sitting under that must be.
The loan sharks of the past often made loans in anticipation of default and foreclosure on tenured land. Even leading up to the last big financial crisis, the bankers were in the habit of making “liars loans” on variable rate mortgages. I’ve even seen a court case where the defendants were acquitted of fraud charges on a home loan that they could not pay off. Why? The bank that made the loan told their loan officers NOT to verify income.
I saw the collapse of the housing bubble coming after reading an article in the OC Weekly in January 2006. The author, Rebecca Schoenkoph, aka, “Commie Girl”, rightly pointed out the obvious “moral hazard” of what happens when all those loans with variable-rate mortgages get a bump of 1 percentage point. The payment would go up by $1000 a month on a typical home in Orange County. And when the bailouts came for the banks, the powers that be never questioned the moral hazards of bailing out the banks. They were the same people who had real influence on how the laws were written.
It’s worth noting that in “capitalism”, when banks make bad loans, they are allowed to fail, and the depositors are paid their savings by the insurance. Had the banks been allowed to fail in 2008, we would have recovered in time, and we would have moved on. That was a moral hazard the big banks could not accept. And they had the political power to deny it.
I don’t think that debt cancellation every 50 years would be such a terrible thing. Yes, there will always be people trying to game the system, timing their loans, lying, cheating, hiding. But we have all of that now. And then there are most people who will manage fine for 50 years without default, without issue, and the economy would be just fine.
The leaders of ancient civilizations in Sumer and Mesopotamia saw the cycle of economics like the cycle of life. They saw the rise of private finance in competition with the power of the state. They saw with increasing debt, greater polarity and hostility within society. They enacted debt cancellation to restore social order.
You do see how polarized our nation is now? You do see how much debt there is now? Do you not see the correlation between the debt and the civil strife in our nation? Might you then agree that a reset is in order?