Debt: What It Is and Why We Fight It

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Taylor: Crazy and utopian Mike Konczal, from the Roosevelt Institute. We’re going to get back in the time machine and come back to the present day. We have a left right now that’s organized around higher wages and job security—and here we are talking about debt. What are the opportunities, what are the risks of that—and any chance for a jubilee in 2012?

Konczal: One of the things I like to emphasize is that when it comes to—you know, there’s obviously a lot of meta discussions about demands and what does the Occupation want—when it comes to debt, specifically when it comes to housing and student debt, we know a lot of things we can do, at the federal level, at the state level, at the local municipality level. Back in the 2008 primary, candidate Clinton proposed a foreclosure moratorium; candidate Obama proposed a modification bankruptcy, which he did not follow through on when he was elected. But we know things we can do. There are liberal wonks who can bore you to death with white papers. The problem is that, as we discussed a little earlier, debt is not seen as a political issue. It’s not seen as something that has gone out of whack. It’s not seen as something that necessitates a political response. 

But the debt market is really a function of the government. If you look at the Constitution, our bankruptcy code is directly in there. The Founders were very aware of what that does. Besides slavery, more than half of all white people who came to the British colonies were indentured when they came here. They were very conscious of what that contract looks like. We talk about makeshift jubilees, right? Everything is kind of out of whack so they declare game over, they hit the reset button on debts. If you look at 19th-century US bankruptcy law, it looks exactly the same way. There were severe financial crises, severe depressions and recessions. And we just created the new bankruptcy code out of thin air and said, “You know what, all this stuff you couldn’t declare bankruptcy on before? You can do it now.” They did it in the 1890s. There were two or three years of readjustments, things went through the courts, and then the economy started picking up again. It was very common. We did a similar thing in the Great Depression. 

So what are the two main mechanisms we have under our economy in America to deal with too much debt? There are two primary ways: one is the bankruptcy code, and the other is inflation. Inflation balances the interests; it’s a way of handling money that balances the interest between debtors and creditors. It puts the economy on a more forward path. It reduces the claims of the past and orientates us more toward the claims of the future. The Fed could be doing more to balance the interest towards debtors, to generate more growth or inflation. They are choosing not to. So, the bankruptcy code: the bankruptcy code does some good things, some bad things, but in the two places where we need it to do the most, it is toothless, it is broken. And those two places are housing debt, and student debt. For housing debt, you cannot reset a mortgage in bankruptcy. There’s a long debate why this is, but for a primary residence, you can’t do it. If you have a vacation home you can do it; if you have investment property, you can do it.  If you’ve ever heard “cram down”–that’s one kind of inartful term–that is the change they were trying to make. They tried to make it in ’09. Larry Summers, Tim Geithner, and President Obama chose not to push it. A lot of progressive senators tried to make it a condition for TARP. Larry Summers said, “No, it doesn’t need to be; we’ll get it later.” They showed no interest in doing this. An absolute shameful act of the Obama Administration. If he loses the election next year, it’ll be mostly because of this, because I think it’s been a huge check on the economy.