“How did you go bankrupt?
“Two ways. Gradually, then all of a sudden.”
—Hemingway, The Sun also rises
Not long ago, anthropologist David Graeber was moved to write 260,000 words on debt* after a twenty minute conversation with a lady at a cocktail party.
He was describing his efforts as an activist working for debt forgiveness for Third World countries mired in debt that was impossible to repay. In the late seventies, Citibank, Chase, and other large banks, recipients of huge deposits from Middle Eastern oil countries, were looking for a way to put those funds to work. They sent representatives to Third World countries, selling dictators on taking out loans to develop their economies. The original low rates soon skyrocketed as U.S. tight money policies sent rates up towards twenty percent. The interest piled up on the loans and, despite best efforts, most of the borrowing countries could not make a dent on the principal of the loans.
The IMF, acting as the big banks’ enforcer (leg breaker), insisted that the countries put severe austerity measures into effect in order to restructure their loans. This caused the economies of these nations to collapse (austerity does that).
Graeber explained that his organization had managed to get the IMF to stop imposing structural adjustment policies, which were doing all the direct damage to the economies, but that the long term goal was debt amnesty. Something along the lines of the biblical Jubilee. “As far as we were concerned, thirty years of money flowing from the poorest countries to the richest was quite enough,” he told her.
“But, they borrowed the money! Surely one has to pay ones debts,” she replied. The comment rocked him. She held fast to this view, even after being told that the unelected dictators of the borrowing countries funneled most of the money into their private Swiss bank accounts.
For weeks, he couldn’t get it out of his mind. Eventually, he realized that throughout history much of the world has regarded paying ones debts as a moral obligation. In most cultures, not to do so is held to be a shameful sin.
In reality, the statement “One has to pay one’s debts,” according to economic theory, is false. The lender takes a risk when making a loan. A bank, risking depositors’ money, is responsible for setting underwriting standards, evaluating the risk, and setting aside reserves for loans that cannot be repaid due to circumstances beyond the risk parameters.
The borrower is responsible for making best efforts to meet the terms, but, in the event of force majeure, should have the bankruptcy laws available to resolve the losses to both parties. This was not so with the Third World loans. International law overwhelmingly favors the lender. If they wish, the banks can hold sovereign nations responsible forever.
Domestically, the situation is almost the same. Individuals who suffer financial reverses go through hell in the bankruptcy courts. Over the past twenty years the powerful banking lobby has managed to get laws enacted that treat the defaulting borrower like a criminal.
At the same time, underwriting standards for loans are almost as weak as at the top of the real estate bubble in ’07, and bankers are aggressively going after all manner of substandard loans from private individuals.
When the market breaks again, the downward pressure on the economy will be greatly exacerbated by millions of low grade loans made to individuals who will not be able to meet the terms. The banks, who have engineered this situation, will extract their pound of flesh from their victims while society, generally, will probably think this is OK.
U. S. banks are extraordinarily powerful politically. Banking has the nation’s largest lobbying presence in Washington (it spent $1.4 billion during the 2013-14 election cycle). No surprise, then, that banking legislation is freighted with the conventional view that the borrower who can’t pay is the deadbeat.
A corporation that goes into bankruptcy has made a good business decision. An individual who can’t pay for falling into hard times is a moral degenerate. It is a hard wired conviction, thousands of years old. Next week is Give Your Son of a Bitch Wall Street Banker a Hug week. Be sure to do your part.
* DEBT: The First 5,000 Years, David Graeber,
Melville House Publishing: May 2011