This article appeared on the parent Website on December 23 at 8:21 pm
By Martin Sandbu
As Christmas Eve dawns, the tent hamlet that popped up in front of St Paul's Cathedral more than two months ago is still there. Today, the mood in the London outcrop of the global Occupy movement is relaxed – a little festive even – compared with the encampment's tense October stand-off with church and city authorities.
But one thing that has not changed is the jovial jumble of causes and slogans. In defiance of those who dismiss the movement as having no unifying agenda, the protesters are happy for each individual to define what they are there to achieve.
Yet there is a strange absence in the cacophony of demands. Almost no echo can be heard from a long tradition of economic protest movements, which, since the dawn of recorded history, have put one unambiguous demand at the top of their agenda: cancel the debts, redeem the debtors.
According to David Graeber, an anthropologist at Goldsmiths, part of the University of London, the first act of many successful rebellions was to annihilate the records of debt owed. In his book Debt: The First 5,000 Years, Mr Graeber describes how "cancelling the debts, destroying the records, reallocating the land, was to become the standard list of peasant revolutionaries everywhere". Is this time different?
After more than four years of trudging through a global financial crisis, the road that seemed to lead to recovery is taking another turn for the worse. Most rich economies are bracing themselves for stagnation at best in 2012. The crisis has many causes but they all have to do with credit and debt: too much of it.
As the boom went on, households and financial companies gazing out on to a seemingly endless horizon of low interest rates and rising asset prices gorged themselves on debt. From 2000 to 2007, the average mortgage debt of US households went from two-thirds of disposable income to more than 100 per cent. British households raised their mortgage indebtedness from 83 per cent to 138 per cent. Among other Group of Seven leading economies, smaller debt binges took place in France, Italy and Canada – but not in Japan, still deflating after its 1990s debt crisis, nor in Germany, where labour market reforms were depressing workers' wage packets.
The greatest build-up of debt was within the finance business. In the eurozone, total financial sector debt doubled from 1999 to Euro 20tn on the eve of the credit crunch, or from 155 per cent to 222 per cent of the monetary union's annual economic output.
Today, "debts exceed what can be paid", says Michael Hudson, an economics professor at the University of Missouri. This is at the bottom of most of what has gone wrong in the crisis: the sum total of debt claims is greater than the worth of what was directly or implicitly pledged against the debt – whether the price of a house, the value of banks’ assets or the economic growth of countries.
If this seems like a new problem, it is only because we have forgotten the past. The importance of debt management throughout human history is evident in how the main religions contain often detailed regulations such as debt cancellations and prohibitions on usury. The biblical jubilee demanded that every 50th year indentured slaves should be freed and foreclosed land returned to the ancestral owner.
Such rules "tell us that the build-up of debts – collective and individual – should always send warning signals through the system because they are unsustainable", says Lord Jonathan Sacks, Britain's chief rabbi.
Debt itself is presumably as old as settled society: the earliest samples of writing that have been recovered are often debt records. Mr Graeber argues that credit and debt predated money itself. Contrary to the common parable of money arising from the need to overcome the inefficiency of barter trade, he points out that in early societies, little was traded in markets. But much was lent and borrowed as favours between neighbours, so a unit of account was needed to keep track of how much was owed.
Denominating debts in a common currency, however, is also what makes it possible to separate the purely economic and legal part of a credit relationship from the personal relations between lender and borrower and the moral context of those relations. In one sense, this is what makes commercial society possible.
"It is important", says Lord Sacks, "to differentiate between community and society. Community is the logic of relationships between friends. Society is the logic of relationships between strangers. Both are valuable in their very different way: if you only have friends and never strangers, then you get crony capitalism...So the Hebrew Bible does not say it is morally wrong to charge a reasonable interest rate – just to friends."
But there is a shadow side to the evolution from paying back a favour with another to formal currency-denominated debt relationships. It strengthens the hold a creditor has on a borrower who falls on hard times. As Robert Shiller, an economist at Yale University, observes: "Ordinary fixed-interest debts make people more vulnerable to their economic fortunes. That's a reason why lenders have always been seen as questionable figures."
Measuring what counts as equivalent to what is owed makes it possible both to post and to exact collateral – which historically was often the freedom of debtors or their dependants or their means of livelihood. Sometimes this has been explicit. In the Brehon laws of mediaeval Ireland, debts were denominated in bondmaids.
Hence the importance of jubilees and other debt regulations in the ancient world: they were a way to prevent credit systems from degenerating into the enslavement of debtors by their creditors. Mr Graeber describes how the Sumerian king Enmetena in 2400 BC declared "a general debt cancellation within his kingdom...the very first such declaration we have on record – and the first time in history that the word 'freedom' [of former debt slaves] appears in a political document".
Since then, few debt build-ups have occurred without debt cancellations or calls for them. In modern times, inflationary policy platforms – such as the "free silver" movement in the late 19th century US, have played a similar political role.
At least until the latest "great recession", inhabitants of the developed world would have treated the association of debt with slavery as a historical curiosity or an aberration of poor countries. But the parallels are closer than they might seem. A look around the countries ravaged by recession and unemployment shows how excessive debt can even today be experienced as a real reduction in freedom.
In the US, many economists say the job market remains depressed because unemployed people who in better times would have moved where there was work are trapped by mortgages "under water" (their house is worth less than they owe on it). Austerity programmes now being required from peripheral European states – and willingly engaged in by others, most prominently the UK – are leaving people without a livelihood or with emaciated real incomes.
The small countries that were first lifted by the global wave of debt and then brutally deposited as credit dried up are seeing their young migrate. One-tenth of Iceland's population has emigrated, says Prof Hudson. And he compares Latvia's mortgage market to the Brehon laws’ system of co-signers and sureties: "Banks demanded personal liability from a borrower's entire family. So whole families are now leaving the country. Trying to collect debts at this level is going to empty entire countries."
Is it far-fetched to think that the history of debt writedowns carries a lesson applicable to the world's current economic troubles? If Prof Shiller had his way, home mortgage deeds would contain "pre-planned debt workouts". He adds: "It should say in the mortgage that if the house price index in your area goes down or there is widespread unemployment, then your payment should go down." But what to do about existing contracts?
There have been modest moves towards latter-day "jubilees". In the case of household debt, the US has implemented programmes for mortgage restructuring but these are not widely seen as successful. There is also do-it-yourself debt cancellation: "jingle mail", in which the borrower sends the house keys to the bank and walks away, with a poor credit rating but debt-free.
In Europe, the single most important debt writedown is the "private sector involvement" in shrinking Greek sovereign obligations. Again, Prof Shiller thinks this could have been averted by making sovereign obligations less rigid, for example by linking them to a country's economic growth. "The irony is that we don't write these things in, even though we've had to forgive debts so many times...The history of debt is one of unreliability of payments." But recent European Union summits have reaffirmed a determination that Greek-style writedowns should not be an option for other countries.
As for banks, governments' determination that unsecured debt to senior bondholders should be honoured in full remains as strong as ever. Only Iceland and Denmark have written down banks' senior creditors – but Iceland had no other choice and Denmark is having second thoughts. Within the eurozone the policy remains taboo. Ireland, whose public finances were wrecked by assuming bank liabilities, has been a tough negotiator on junior debt – but even as Dublin plans to refinance the senior obligations of its (now largely publicly owned) banks, it remains adamant that it will not repudiate or restructure anything.
"What do you do then?" asks Prof Hudson. "Either you enter a process of debt deflation and "concentrate property at the top of the income distribution", he says. "r you write down debts to amounts that can be paid, in which case you can keep a middle class." If these are the alternatives, jubilees may yet stage a comeback.
© The Financial Times Limited [2011]
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