Debtors’ Prison: The Politics of Austerity versus Possibility 
by Robert Kuttner (2013)
This book is by one of my new favorite authors. He and the book are described on the jacket flap in a very well written piece, so I have started this post with it in its entirety. Highly recommend this author and all he has written.
One of our foremost economic thinkers challenges a cherished tenet of today’s financial orthodoxy: that spending less, refusing to forgive debt, and shrinking government — austerity — is the solution to a persisting economic crisis like ours or Europe’s, now in its fifth year.
Since the collapse of September 2008, the conversation about economic recovery has centered on whose debt to forgive, and how to cut the deficit. These questions dominated the sound bites of the 2012 U.S. presidential election, the fiscal-cliff debates, and the perverse policies of the European Union.
Robert Kuttner makes the most powerful argument to date that these are the wrong questions and that austerity is the wrong answer. Blending economics with historical contrasts of effective debt relief and punitive debt enforcement, he makes clear that universal belt-tightening, as a prescription for recession, defies economic logic. And while the public debt gets most of the attention, it is private debts that crashed the economy and are sandbagging the recovery — mortgages, student loans, consumer borrowing to make up for lagging wages, speculative shortfalls incurred by banks. As Kuttner observes, corporations get to use bankruptcy to walk away from debts. Homeowners and small nations don’t. Thus we need more public borrowing and investment to revive a depressed economy, and more forgiveness and reform of the overhang of past debts.
In making his case, Kuttner uncovers the double standards in the politics of debt, from Robinson Crusoe author Daniel Defoe’s campaign for debt forgiveness in the seventeenth century to the two world wars and Bretton Wood. Just as debtors’ prisons once prevented individuals from surmounting their debts and resuming productive life, austerity measures shackle, rather than restore, economic growth — as the weight of past debt crushes the economy’s future potential. Above all, Kuttner shows how austerity serves only in the interest of creditors — the very bankers and financial elites whose actions precipitated the collapse. Lucid, authoritative, provocative — a book that will shape the economic conversation and the search for new solutions.
First of all, the bankruptcy issue REALLY bothers me because corporations had been lobbying hard for changes to it as far as consumers’ debt was involved. When the bill was passed by Congress under Bill Clinton, he vetoed it. Elizabeth Warren does not directly take credit for this, but she relays in her memoir that she had had a meeting with Hillary Clinton and explained why it was a bad bill, and suggests that perhaps Hillary had a discussion with Bill about it, leading to the veto. Therefore it is maddening that later, when she was Senator, she voted for the same bill with minor changes. On the other hand, Donald Trump opening brags about how he got “out” of his failing business with his personal wealth intact because as a corporation, the rules are oh so much kinder.
For example, if your house went into foreclosure, and was sold at auction, the difference between the amount you owe and the amount the sale brought in, is considered INCOME by the IRS. Now, I don’t recall if this was directly due to the new bankruptcy bill or existing tax code, but the point of the stupidity of this is that you have just lost your home because you don’t have enough money and now they expect you to pay taxes on the $50k or more “income” from the debt forgiveness.
Under bankruptcy law, no owed income tax is discharged. So bankruptcy does not relieve you of any burden of paying substantial money on a mortgage for a home you no longer live in. And is a crippling amount of debt as well. Even worse, maybe you still owe student loans at an inflated interest rate (because they could charge it, instead of directly from the government, student loans were changed to pass through banker middlemen so they could scrape off some profit). Furthermore, student loan debt is not dischargeable by bankruptcy. And, unlike the options available for businesses, the interest rate is not renegotiable, despite the fact that the real life interest rate has dropped from 8% to 2% or similar. Why not? Why should student loans in particular, unlike any other loans, be legally non-negotiable? Because the new corporation middlemen want every drop of blood they can get.
Thankfully, enough sanity prevailed that under Obama, special dispensations were put in place for about 5 years that changed the taxable status to non taxable on the ghost of forgiven debt due to the extremity of the financial situation of so many people. But we are still living in recession so that program probably should have been extended longer. But of course, the Republicans don’t want to give the little people any slack because it would be “immoral” to do so.
Side note: Bankruptcy laws are subject to state level rules so whether you lose your home or not depends on where you live and that is just wrong. An artifact of “olden days” of sovereign states, but no one’s rights should depend on geography. A bunch of the ENRON crooks bought multi-million dollar mansions in Florida and furnished them lavishly because the state excluded “homes” from forfeiture, including I believe personal property contents. Whereas the Minnesota law is different, as are many states. I was amused when reading the Minnesota rules (there is a peculiar option of picking Federal rules instead in some? all? states) that they were so archaic, they include an allowance to keep one watch. Obviously this was from hundreds of years ago when watches were pricey items, not $10 throw-away watches available today. So I joked that in that case, anyone doing bankruptcy in Minnesota should use any cash or other vulnerable assets and put the money towards buying a Rolex.
Chapter 7 is the chapter that I liked best: The Moral Economy of Debt. So often we hear conservatives and other idiots proclaiming that welfare discourages people from working, so therefore welfare is immoral because laziness is immoral. They firmly believe that any assistance (if any at all, with none being preferred) to poor is immoral. Feeding starving children was likened to feeding a stray dog by one politician. They just keep breeding and coming back for more. Better they should go away and die apparently.
These people, the ones who find it so appalling and horrible to help their fellow human beings out, baffle me completely. The stingy amount offered for food assistance is so meager, it would only take less than a minute I’m guessing, of a CEO salary to pay that bill and that is because they don’t pay their workers a living wage. In fact, I don’t think people should have to “settle” for a living wage! I think people deserve a guaranteed home, food, utilities, and transportation at a minimum. And free daycare. And some kind of job guarantee so they can no longer fire you “at will” and not being to leave “at will” is not worth it. There is no loyalty or sense of duty to the human beings doing the actual work anymore. Discard them like outmoded electronics. Plenty more looking for work that will take their place. And probably work cheaper, so desperate they are to have a job. And the corporations depend on their power over workers’ lives and deaths with a flick of a pen should the worker defy any burden placed upon the working conditions. Surely we haven’t all died who remembers the Triangle Shirtwaist Factory fire? Women locked in with little ventilation forced to work many hours without breaks, hunched over their machines, restricted even for bathroom breaks, and then when a fire broke out, they could not get out because they were locked in, lest they slip out for a few minutes of fresh air.
Since the majority of people are working class, why are they so hostile to making the wealthy (who got there on the backs of the labor and consumption by the workers) pay a bigger share of the taxes for the overall social good? Why do they spit with contempt about the “takers” of society? Why do they begrudge children a hot lunch as part of their public education? Why do they want to force women to give birth, but then deride them as Welfare Queens, sluts, and only worthy of contempt. Why aren’t women compensated for doing their “women’s work” of birthing children, household labor, and caretaking of children and elders? Why don’t pro-lifers have a problem with multi-million dollar missiles paid for by tax dollars to no bid contractors with sweetheart deals when those bombs are a one use only and are dropped to kill people, often disproportionately women and children. How is this moral?
Why do all the mushy Thanks Mom! call outs be professed when the mothers are denied a chance to be with their children because they must do paid labor? Why is paid labor so moral and righteous and obligated for economic disadvantaged people while multi-millionaires like Mitt Romney sit back living off the interest he made by buying and destroying businesses employing regular people? And he pays less tax on too since rich people get a different class of taxation for these “capital gains” that they have lobbied hard for for decades. And the “death tax” aka estate taxes, designed to prevent a hording of wealth among fewer and fewer family dynasties. Why do regular folks believe the propaganda spouted by puppet politicians think that this tax will ever effect them? I think it starts at $250,000 and no one I know will ever have that problem. But that’s what happens when the public airwaves are bought and sold to lying corporate and republican shills and have no obligation for fair and balanced (what a joke for Faux News to have that as a slogan) reporting. No, the mega conglomerates are squeezing out investigative journalism, and certainly not allowing any speaking truth to power by columnists and editorials. Advertisers don’t want to pay for ads when their bad behavior is called out on the front page.
So we have things like the creator of FedEx who proudly announced that despite being in the red by millions the first five years of its operation, it wasn’t a problem to borrow more, because then the creditors are “partners” instead, who don’t dare pull out $$ and lose everything. Yet, FedEx doesn’t have a union shop, the drivers are held to extremely and increasing demands to do everything faster and more of it. And they are also, I think, considered independent contractors, rather than employees, so the company doesn’t have any responsibility to pay benefits or profit share with employees. And if you don’t like it, tough. No job for you. The problem with this “at will” relationship is that the workers have absolutely no power without a union. Contract law supersedes labor laws. Half of the labor laws we think are protecting us, only apply in restricted situations, such as business must employ 50 or more people. That’s nice for the small business, but it doesn’t seem quite right that their employees are thereby investing their lives in the business without any profit sharing. And similarly, employers know that the rule is 40 hours a week equals full time job and thus it requires paid benefits, so they only hire part-time workers up to 39 hours. Therefore, no benefits, not even prorated ones. So once again, the companies are making profits at the cost to the workers. And then workers have to pay sales tax on items they buy. As well as income tax, etc. on their earnings, under a general philosophy that everyone should pay some income taxes to be “fair” when in fact, it is not fair that people earning say, less that $50k a year should have to pay any income tax. In real life, that is barely enough for a small family to have a tiny piece of the American Dream. Especially since wage workers pay higher income taxes than those living on stock dividends from inherited or invested wealth. And there is a cap on social security contributions so no one making over $110,000 thousand a year pays ANY social security on income above that ceiling.
While the corporations get to deduct the workers wages and benefits, and even penalties or lawsuit costs for their malfeasance. The republicans whine about how much the taxes are on business (about 35% NOMINAL post Reagan and Bushes I think) but the effective tax rate is often zero what with their deductions and loopholes and lawyers, and puppet legislators clearing the way. Even when they are fined 5 billion dollars, they can write that off on their corporate taxes, so the net cost to them is relatively trivial when their criminal actions gain them a trillion. No one injured by the behavior that caused the $5 billion dollar fine ever gets a penny of recompense. They are never “made whole” by the law. Their only recourse is to have enough money to pay for a lawyer for years and hundreds of hours of work, so basically no lawyer will take the case because they cannot afford to work so hard with no income either. It has been widely demonstrated lately that, in fact, many multi-billion dollar companies actually work the loopholes such that they get multi-million and even billion dollar refunds!
We have mandatory assignment of criminal lawyers to the poor (Thank you Mr. Gideon), but to have a really fair justice system, their should be state paid lawyers available to civil cases as well. Still a David and Goliath, but better than nothing. Also, all the business law firms have hundreds of associates and very deep pockets, as well as shredding machines, so to acquire the evidence of wrongdoing is very very difficult.
And of course, the corporations can declare bankruptcy and never have to pay employees shit and may take their pension funds down with them to to pay off other business creditors. Thank you Hillary!
People who claim helping each other by pooling tax dollars to bring about social justice and a more egalitarian society is IMMORAL are actually “opposite world” people who are the ones actually being immoral. Why is it moral for companies to shut down entire towns by moving their factories to China and exploiting cheap labor and no regulation about water, air pollution, or hours or anything else. If corporations are people, which they clearly are not despite the SCOTUS ridiculous ruling, then someone needs to be appointed to the role of the conscience for the entity. But that won’t happen because the whole economic emphasis by the republican push since Goldwater has been profits before people. The financial sector loaned money with only a $1 collateral to $30 they leveraged. This means that for every dollar they actually had in the bank, they loaned out 30 on the principle of the loans won’t default so they can loan money they don’t actually have in the bank. And to make sure to mitigate their risk given the incomparable stupidity of this, they get AIG to cover their bets with insurance. Because they too bought the notion that these investment bankers were smart and the bubble wouldn’t burst, and they were stupid eager to gather insurance premiums on debts, and when they did default, the U.S. Government bailed them out to a tune of $180 BILLION. So it cost those banksters and the insurance idiots NOTHING, in fact they got bonuses and no one went to jail.
Imagine the good that staggering amount could have done for millions of people had it been spent on Main Street people instead of the banksters and the fools that insured the reckless gambling of casino Wall Street. Wouldn’t you like to spend 30 times your income and be able to buy insurance that covers your debt when you obviously can’t ever repay it? So they gambled with other people’s money, and paid for insurance to cover their bets so even when they lose, they don’t suffer any consequences. And the insurance companies couldn’t cover the bets but they bore no real risk because they always new the government would bail them out because they were “to big to fail.”
The government, instead of bailing out the banksters, should have paid off or a fixed sum for every mortgage for people earning $100,000 a year or less with a cap on the house value of $200,000 so millionaire mansions didn’t get let off the hook. Wow, what a prosperity push that would have been. Freeing up people from fear of losing their homes, going bankrupt from the credit default swaps imaginary “financial instruments” they invented.
But no, paying off people’s mortgages instead of the banks, would be IMMORAL. No one DESERVES A FREE RIDE! (Except corporations!) If you don’t have a job you are worthless! Working for wages makes you a MORAL person. Why should my taxes go to pay for public schools when I don’t have any kids? Why should my tax dollars go to pay off some loser’s loan they shouldn’t have gotten in the first place because obviously they don’t deserve a home of their own? Why should my tax dollars go to helping someone else’s kid go to college? Why should my tax dollars be used for legal abortion when I have sincerely held religious beliefs and the pregnant slut should have kept her knees shut?
Maybe because it is the decent, humane, right thing to do? We all benefit from an educated, less fearful, and healthcare for all. Poverty is death.
Conservatives believe that giving human beings handouts like that would make them lazy (if they weren’t already among the “takers”). That’s why conservatives and Republicans can hate the wage earners and do not see that the corporate “people” are being given a great a share of taxpayers’ earned income. And the ordinary folks who follow their tyrants scream about their taxpayer dollars paying for food assistance! Idiots. Funny how it never seems to cross their minds that if business paid a better wage there would be less need for any social services, so really, it is the fault of the corporations that make their profits on the backs of the workers by denying them a decent wage. Then conservatives complain and fight government “entitlement” programs for the poor, when these programs are merely making up the profit that goes from workers loss of wages to corporate profit.
The whole issue of morality and subsidizing the less fortunate seems to be really hard for conservatives, even if they would benefit. However, they do not get all up in the face of the oil companies that pay a pittance to lease the oil rights from the government while having no obligation to confine the sale of our oil to the U.S. but it goes out to the “free” market and so we have to buy our own oil back at as high of price as the corporations think they can get away with, and they get $50 billion or so in SUBSIDIES too, plus tax breaks and other benefits. Corporate welfare does not arouse the ire of the average person, but by God, if that slut down the road gets pregnant, she deserves to die from an illegal abortion rather than allow doctors to safely perform an abortion. From chapter 7:
Reckless indebtedness leads to crisis. More often than not, the culprit is debt that results from the cycle of financial speculation and crash. [i.e. casino Wall Street] After a crisis, debt relief is necessary for economic recovery. Avoiding moral hazard is a proper issue for averting the next crisis. Prevention of disabling debt is better achieved by adequate regulation of credit before the fact than by erecting prisons for the CASUALTIES of the last crisis. [EVEN] INTELLIGENT PEOPLE SEEM TO HAVE A VERY HARD TIME GRASPING THAT PARADOX.
One reason for this myopia is that the pragmatic question of debt relief after a crisis is complicated by relations of power and privilege. Debt, as we have seen, is not just a means of financing investment or addressing public needs; it is a part of a system for maintaining SOCIAL RELATIONS or GEOPOLITICAL ADVANTAGE. In the collapse that began in 2007, the most toxic forms of debt were those incurred or promoted by BANKS. Banks, nonetheless, have retained the power to block debt relief for others. So have powerful nations. Today, entire economies are enlisted in the service of repaying old debts, even though DEBT RELIEF would be far more efficient and far more SOCIALLY JUST.
As we saw in the story of Daniel Defoe and the invention of modern bankruptcy, debt relief has been replete with double standards since its inception. Intermittent acts of mercy, case by case, were a poor substitute for national macroeconomic policies. As late as the nineteenth century, nations did not have the institutions or insights of modern economics. The banking system was badly regulated and chaotic. Only Britain had a central bank, and its bias was deflationary. Demands for respite from depression in the form of cheaper credit or bankruptcy reform were ad hoc and episodic.There was no coherent conversation about what today would be called countercyclical policy to temper the tendency of markets to overshoot on either the upside or the downside. (p. 173)
What has not evolved with the institutions is the distribution of political power. If anything, financial elites enjoy far more concentrated influence than at any time since the Gilded Age. Thus the policy mistakes are not errors of judgment but the natural products of LOPSIDED POLITICS. (p. 174)
DEBT AS SIN
Beginning with the statute of Queen Anne, the idea of a fresh start, of wiping away past debts, was for the MERCHANT class, not for ordinary deadbeats. This distinction was intimately connected to the widespread belief among elites that TOO MUCH KINDNESS OR CHARITY would SPOIL the poor. In his celebrated work The Fable of the Bees, written in 1705, the very year bankruptcy reform was introduced in the English Parliament, Bernard Mandeville waned that the “proclivity to idleness” made relief of the needy a bad idea. The paupers’ workhouse and the debtors’ prison were twin emblems of that philosophy. Edward Bulwer-Lyton, an early nineteenth-century conservative critical of aid to the poor, wrote, “The Poor-laws were intended to prevent mendicants; they have made mendicancy a legal profession.” Like the double standard in bankruptcy, this conservative view of debt relief and poor relief is ENDURING. When Charles Murray wrote in his best-selling 1984 critique of welfare policy, Losing Ground, “We tried to provide for the poor and produced more poor instead,” he was channeling Mandeville and Bulwer-Lytton.
I simply cannot fathom the conceit of the elites that there can be “too much kindness or charity.” They certainly don’t have to rely on either kindness or charity. They are more than happy to exploit the poor in the name of their god Profit and the false dogma of “free market capitalism” when it comes to their own lives. Today we have people, the 1 percent or the .01 percent perhaps, that have double digit BILLIONS of dollars. And they all begrudge the pittance anyone at the poverty level ($12,000 a year? for a family of four?) may get, after PEEING IN A CUP, to get a few dollars for food. And some are even so petty, they want to micromanage literally every bite you eat with policies like aid not being allowed to be used for STEAKS and SEAFOOD.
Poor people should dumpster dive for scraps instead I guess. No soda pop for you! It’s bad for you (but not for me). No chips, no treats, just quit whining and eat your mac and cheese. Obviously we are giving too much money to the poor for food because see how fat they are?! They don’t know how to budget! They don’t know how to shop for better food! They don’t eat enough vegetables (they could even grow their own!). The are diabetic because they eat too much sugar or starch or they don’t exercise enough or they (women) dare to have sex and still be eligible for assistance. God dammit, the sluts even want taxpayer dollars to pay for their birth control (aka medically necessary prescription that insurance should have to cover on the principle of equal protection)! Meanwhile politicians are being wined and dined and off to retreats or golfing in Scotland as well as check kiting their own congressional bank.
If ordinary people behaved like the elites and politicians, we would all be in jail.
Curiously, the language of morality is seldom directed against the improvident [great word] CREDITOR. Yet as applied to debtors, the earlier, moralistic view of unpaid debt as sin persisted alongside the more modern instrumental one.In a society heavily influenced by Calvinism [loved to burn heretics to HIS PERSONAL RELIGIOUS BELIEFS alive, with green branches so it took longer – really fucking moral that], commercial success was given a moral free pass, while failure and debt suggested divine disgrace — a sign, as Cotton Mather put it, that the debtor was “most evidently called of God into a low and mean condition.” [Mather was an instigator of the Salem Witch Trials just to put his religious virtue into perspective when he declaims God wants the poor to be and remain poor.] Religious imagery and the language of social obligation are filled with metaphoric and literal references to debt. Our debt to God and to parents who brought us into the world are incalculable. When a felon serves out a prison sentence, he is said to have paid back his debt to society. Anthropologist David Graeber observes that in several ancient and modern languages. . . debt, guilt, and sin are the same word.” (pp 174-5)
Like all religious dogma, every answer is God or the Devil. If you are poor, you have bad karma or you aren’t going to church often enough, or you don’t tithe enough, it’s always the fault of the individual NEVER THE THIEVING BASTARDS AT THE TOP or systemic discrimination or unequal opportunity or by birth into a farm family instead of an oil company magnate family who probably cheated everyone on their way up, and their workers, and did business with Hitler and Stalin or bootlegging. Real righteousness there.
Before the invention of the modern banking system, finance was local. Debtors usually knew their creditors, and there was an intimacy to monetary obligations. Repayment was local. Debtors usually knew their creditors, and there was an intimacy to monetary obligations. Repayment was a personal and ethical obligation, and default was a moral failing. But as capitalism evolved into a system of impersonal financial intercourse, the immediate connection was severed. Thus the moral meaning of debt changed, at least for COMMERCIAL TRANSACTIONS. Bad things sometimes happened to GOOD entrepreneurs, and life needed to move on.
Bad things happen to women too, like when they are servants or slaves being raped and made pregnant by the masters, but obviously, if you are raped you are asking for it and a whore rather than just being a living woman subject to powers beyond her control.
An insolvency was often the consequence of a freely assumed business risk that went sour for reasons beyond the debtor’s control.
Morality is here too – circumstances beyond your control. In others words, like the “good” abortion is understandable because you were raped, that is more moral than choosing an abortion because you simply don’t want to completely change your entire life because of an unplanned pregnancy. Abortion is more palatable for some if there has been rape, incest, or the life of the mother (though I don’t think the forced-birthers really believe it). However abortion on demand, or without remorse or regret is immoral to forced birthers, even in the case of permanently and badly flawed fetuses that will need 24/7 care all their lives and probably not be allowed to have a DNR so that life at all costs is preserved however cruel and miserable their condition is, all efforts must be made to save the life.
PHYSICIAN ASSISTED SUICIDE
This is also why we force dying people suffer until their bodies finally collapse instead of allowing them the mercy of choice when to end the suffering and take a pill that will simply let you die. That and the Catholicism belief that suicide is a mortal sin. WTF? If you are dying, in one respect, you are already dead. How can there be a moral judgment on choosing to die instead of suffering? OH WAIT, that’s right, SUFFERING IS MORAL, according to the Church because either God wills it so, or because the Church cannot otherwise justify why it takes people’s money and yet God does not answer their prayers to end their suffering.
You are dying, if you want to stop having to suffer, surely a little mercy and compassion is better than 10 minutes more suffering and drugged to try to halt the pain, and why should religious dogma be the rule of law? I don’t believe in God for many reasons. And when my multiple sclerosis gets really bad, I do not want to live. Life is more than breathing, unaware of your surroundings, and bedridden. I do not believe a god would deliberately make us suffer if, as is purported, god is a loving god. I do not believe religion is the sole source of morality. Look at all the killing done in any given god(s) name. When Bible versus say things like “God loves those who fear him.” I gotta ask, is that really a loving god that demands you believe or will face hellfire and damnation?
Investors were consenting adults. [wow the sex/pregnancy/abortion really fits with this debt and sin and morality] Settling the debt and allowing commerce to resume was in the general economic interest — even in the interest of creditors, who were better off getting some payment rather than merely enjoying the satisfaction of seeing the debtor suffer for his sins.
Eureka! That’s why the forced birthers are so vicious — they equate forcing birth rather than allowing abortion to force a sexually active woman SUFFER FOR HER “SINS”!! They don’t give a shit about the now living baby — hence hatred of having to pay taxes to help the SINFUL WOMAN take care of the child!!!
As debt became impersonal, it also became transferable. Debt was so much paper. A merchant could sell it at a discount, say 90 percent — the flip side of the buyer’s 10 percent interest change — to another merchant, or to a “factor” specializing in trading cash for accounts receivable [with thug employees I am guessing], or to a bank [banksters today]. By the seventeenth century, the emerging banking system was already about creating, discounting, trading, and speculating in paper. This had enormous benefits for the expansion of commerce, but also risks. As debt collateralized further debt in a pyramid of paper promises, successful speculations depended on rising prices. When the bubble burst and prices abruptly fell, the pyramid came tumbling down. The severity of the crash was in direct proportion to the leverage. (p. 175)
Innocent bystanders got caught up in this chaos, and the system displayed scant compassion for the little people.
This is followed by the possibly not well known fact that Charles Dickens, the author of multiple famous books (Little Dorrit describes the same prison), spent time in a debtors’ prison when he was 12 years old. It was common that the entire family go with the bankrupt common man since, after all, no woman and children could pay rent without the father’s income. The guards had to be bribed to let them have certain privileges or they would just take a cut of something friends or family members would bring to help the family. Hundreds died of starvation in debtors’ prisons because, obviously, you can’t buy food if you have no money and are in prison so you can’t work. The entire concept is absurd beyond belief but it endured for too many years without anyone not directly effected giving a damn. Very moral of the Christians in charge of the process, eh?
A ruined small bankrupt caught in a larger web of financial transactions inhabited a different universe from a corporate executive leaving the messy details of a Chapter 11 filing to the firm’s layers and accountants. Today’s unfortunates may not be literally in prison, but the nightmare experiences of homeowners try to navigate the private banking bureaucracy in the hope of staving off foreclosure and eviction would be grist for a modern Dickens, if not a Kafka. (p. 176)
The thing is, the entire financial system has been flawed for a long time. I don’t remember which book I read it in, but there was a Frenchman (18th century maybe) who was a scam artist and he got a lot of people to give him money to invest and paid off others with the loans Bernie Madoff style Ponzi schemes (maybe he was the original Ponzi). He had to flee for his life at various times because he got caught. This scheme, as Wikipedia states, was also covered in two Dickens novels. The author describes the bubble from the cost of the Revolutionary War for example. William Duer, who was the “secretary of the Board of the Treasury, speculated in various forms of paper, including federal government notes, land warrants, state securities, and bank debt. He financed his speculations with BORROWED MONEY.” Talk about a conflict of interests!
With the collapse in March 1792 of the bubble in paper assets, partly pumped up by Duer himself, thousands of investors, large and small, were ruined, and America’s first financial panic ensued. After fending off creditors for several years, Duer himself went to jail, owing upward of $3 million. James Wilson, a delegate to the Constitutional Convention and a SITTING Supreme Court Justice, died in a North Carolina debtors’ prison.
Somewhere I read about this duality of debtor to creditor. The debtor is always to blame and never the creditor. But really, are today’s credit card behemoths nearly equally responsible for pushing their credit cards and encouraging greater and greater debt when simple arithmetic shows you that a $1,200 a month income should NOT be extended a $25,000 line of credit. And the fees! Thankfully we have the brilliant Elizabeth Warren that gave us the Consumer Financial Protection Bureau so some practices have been changed, but I still have to research WHO and WHEN the freaking usury laws were eliminated. Ah, I just did a little Wikipedia search on USURY and low and behold, the BANKERS and INSTALLMENT PLAN SELLERS (credit cards) are EXEMPT from otherwise state legislated usury limits, effectively eliminating any protection. And note, one of the reasonable regulatory agencies to set a Federal standard for limits on interest rates, the CFPB, is specifically enjoined from doing so. And naturally, behind it all is a SCOTUS decision or two plus Reagan (1980) et al were bought and paid for decisions “fixing” this problem of unlimited interest being charged by banks and credit cards.
Seriously, the Fed has interests rates set at a very low point (good for them, that’s what we need in a recession, but boo hiss they are succumbing to Republican pressure to raise), but credit card interest rates remain at 16 or 25% in some cases. Now they are required to show on your statement what the total cost of minimal payments will be and how many years it will take to pay off the debt. That is helpful, but I don’t think the psychology of people quite matches up to the reality when they use a credit card (especially me!). Especially when faced with a bill for $1,000 for a root canal and you are living on a paycheck to paycheck wage! I mean these credit card companies are like drug pushers in that sense, they get you hooked and make billions while you struggle to pay rent and the credit card bills, but you get zero sympathy from anyone because getting into debt makes you stupid not brainwashed and addicted by perpetual exhortations to BUY BUY BUY.
And then there comes the day when the $35 late payments just keep adding in, plus compounded interest (99.9% of people cannot figure out how to process compound interest with or without a calculator). Or alternatively, your bank decides your money is not making them enough money so they require you to maintain a minimum balance of $2,500 or $5,000 or be charged $25 or more per month for the privilege of THEM MAKING 6% OR MORE interest off your money, while you might be getting 1% if that on the cash you can’t touch. You are essentially LOANING THE BANK YOUR MONEY SO THEY CAN MAKE A LOT MORE MONEY and there is no real alternative in modern society except the possible return of POSTAL BANKING. In fact, your failure to pay incrementally instead of paying off balances each month counts AGAINST you in your credit score because the creditors DON’T MAKE ENOUGH MONEY WHEN YOU PAY IN FULL. Credit lines are reduced when you do not use the card enough to fit some magical algorithm of profitability. I was penalized in my credit report because I had NOT BOUGHT A CAR IN TEN YEARS. I could scarcely believe that having paid off my car, and having low miles, made me a less desirable credit risk. And these credit scores are routinely used by rental companies today so if you are struggling, even if you have always made your rent, if you were to try to move to another place (say for a job) and your credit score doesn’t meet their bureaucratic computer algorithm, you don’t get to rent. Then that denial goes in your record, and a vicious cycle ensues, and half the time you don’t even know WTF they are basing the credit scores on – like owning a debt free car being a BAD thing.
On the eve of the crash, the states displayed a crazy quilt of bankruptcy laws, many left over from colonial times. Most favored CREDITORS. Only Rhode Island allowed insolvent debtors to initiate a plea for relief and to keep 5 percent of their assets upon legal discharge.
Despite the explicit authority granted it by the freshly ratified Constitution to enact a comprehensive federal bankruptcy law, Congress remained deadlocked. [pfft!] Opinion was divided between Federalists, who were sympathetic to the merchant class, and Jeffersonians, who saw speculators like Morris and Duer as emblematic of a new ARISTOCRACY OF WEALTH abhorrent to republican and agrarian principles. Complicating the debate was the shared premise that bankruptcy, as defined by the statute of Queen Anne, meant relief for merchants but not for the common man. This also offended the Jeffersonian soul.
And my soul too. And two hundred years later we still do not have a COMPREHENSIVE BANKRUPTCY LAW that serves the common man or woman. Thank you Hillary Clinton for your vote as Senator to support the bill the banksters have been trying to get passed for a long time. They extend too much credit, suck the life out of the debtor, and then cry FOUL when the person has no choice but to resort to bankruptcy and want to renegotiate their interest on a mortgage, or the credit card debt, or any sort of debt forgiveness. Nope, not for you peons, you immoral lot, straight to the homeless shelter for you. You can’t, as I said at the start, get your school loans forgiven, reduced, or even the interest rate (soooo much higher than other loans at current rates) reduced. No income tax on ghost “income” from debt forgiveness either, when that is not income by any normal meaning of the word. Now you have to pay and pay forever even if it is a small amount.
And the whole legal system with the fucking obsession with precedent. Think for yourselves, people! Apply common sense, individual rights, work with the laws but do not blindly follow (ha ha, Justice being blind, what a crock) laws that are obviously bad, and deliberately so in the case of usury laws or abortion restrictions. There are two kinds of people, one of my professors once told me, people who believe in the law and people who believe in Justice. He was a law guy and I was a Justice idealist. So the whole precedent thing drives me nuts. For pity’s sake, that is how we got segregation in the first place. Think how many lives were damaged for generations because of it, and the bigotry it gave crackers leave to lynch, attack, and ill treat minorities in too many ways to count under the authority of the legal system. Jury by your peers? Not if you were black, blacks and women, were not allowed to serve. And today’s language for this is “make America great again” and the nutters who scream Christian values while showing no mercy, pity, compassion, or charity for anyone else.
The federal bankruptcy statue finally enacted by Congress in March 1800 was modeled on the British law. The intended beneficiaries were commercial debtors. Only those with at least $1,000 of debt could file, and only CREDITORS, not debtors, could initiate proceedings. . . . Jeffersonians were outraged that it served speculators; merchants were disappointed that it provided too little practical relief. Only about eight hundred cases were filed, and creditors ended up recouping about ten cents on the dollar. As one critic complained, “We saw rich men today, bankrupt tomorrow, and the next day in full business and great style, while the poor farmer or manufacturer. . . must suffer the penalties of the law in a jail.” In 1803, with Jeffersonians in control of Congress, the law was repealed, two years before it was due to expire. (p. 179)
There were various tries at bankruptcy laws that were implemented and then revoked, voluntary and involuntary, “but it did not prevent a massive shift into debt peonage among farmers afflicted by falling commodity prices [after the Civil War]. Not until a time when corporate power was ascendant did Congress enact a permanent general bankruptcy law. The Bankruptcy Act of 1898, of which more shortly, was heavily BIASED TOWARD THE COMMERCIAL CLASS and laid the groundwork for today’s Chapter 11.” (p. 180)
COMPASSION FOR THE SPECULATIVE CLASS (p. 186+)
. . . . As the [bankruptcy] law evolved, courts and legislators found ways to keep the wheels of commerce turning despite recurring panics and collapses. Most of these measure favored INSTITUTIONAL ELITES. Only very occasionally did they provide relief for ORDINARY PEOPLE. Though CONTRACTS ARE PRESUMED SACROSANCT and explicitly guaranteed by article 1, section 10, of the Constitution, our legal system offers innumerable exceptions beyond the bankruptcy system.One such mechanism was the expansion of the LIMITED LIABILITY CORPORATION. In Anglo-American law, corporations were originally CHARTERED FOR SPECIAL PURPOSES for FIXED PERIOD OF TIME and required incorporators to apply directly to legislatures. In 1809, the New York State legislature enacted the first general incorporation statute, intended to promote the growth of manufacturing companies. By 1815, more than a hundred new industrial corporations had been approved. Other legislatures, fearing competitive disadvantage, soon followed.
In a partnership, as opposed to a corporation, each individual partner, such as the luckless Daniel Defoe or John Dickens, was personally liable for losses. With the growth of the general corporation came a doctrine not unlike bankruptcy. By incorporating, entrepreneurs and investors limited their financial exposure only to the money they had put into an enterprise. If the business failed, none of their other assets could be touched.
Long before the creation of modern bankruptcy relief under Chapter 11, limited liability provided financial protection for the expanding commercial class. It could be, and was, justified as facilitating a risk-taking society. By contrast, a small farmer who had a crop failure could wind up losing everything, evicted from his land or pushed into a debt peonage relationship with a larger merchant or landowner. His LIABILITY for personal debts was UNLIMITED, bankruptcy was unhelpful, and state forbearance laws provided only limited and intermittent protection. By the late nineteenth century, corporations (and their cousins, trusts) concentrated the distribution of wealth and political power in America. Both the common and statutory law ensured that despite revers to particular individual investors, the corporation would thrive.
A second form of corporate favoritism is the case of the railroad industry, recipient of massive public subsidy, object of endless private speculation, and beneficiary of legal favoritism. By 1880 , federal and state governments had subsidized PRIVATE development of the railroads by giving rail companies $700 million in cash and loans, as well as 155 million acres of public lands, an area equal to four time the size of New England. Some of these lands were used for actual rights-of-way, but far more of them were sold to raise cash. Not surprisingly, railroad ventures encouraged speculation. . . . The Gilded Age is best known as a period of extremes in the concentration of wealth and political power; it was also an age of extremes in the access to credit and to debt relief. (p. 189)
The author continues with a recap of changes and bubbles and failures of the Fed and such for decades. In 1938 the Chandler Act introduced the provision”for the rehabilitation of individual debtors. This was during the New Deal of course. However, as to be expected, the “barriers to individual debt relief were increased” subsequently because of course, personal bankruptcy filings rose.
The 1978 revision. . . . By making it easier for companies to emerge from bankruptcy, the legal changes made it more tempting for corporate executives to take their companies into bankruptcy. Judges were EXPLICITLY given the authority to MODIFY PRIOR CONTRACTS for all debts EXCEPT MORTGAGES. [!!!!] In the year after the law was enacted, filings increased by about 50 percent. This increase set off a lobbying campaign by bankers to raise the hurdles to easy bankruptcy. But when the bankers finally succeeded in persuading Congress to tighten the law in 2005 [Hillary Clinton was Senator from NY and voted for the bill], the crackdown was directed mainly AGAINST CONSUMERS. [!!!!] Bankruptcy remained broadly available as a tool for corporations to shed debts. (p. 199)
Moral Hazard Revisited
In a Chapter 11 bankruptcy. . . . Eventually, the corporation emerges from bankruptcy with a nice, clean balance sheet. In recent years, Chapter 11 has been a FAVORITE MANEUVER to ESCAPE LABOR CONTRACTS and PENSION OBLIGATIONS.Bankruptcy has also become a key technique in one of the most abusive new forms of financial engineering: hostile takeovers, or leveraged buyouts. Beginning in the 1980s, what were then called corporate raiders used BORROWED MONEY to take control of a publicly traded company, with the company’s own stock as collateral. [!!!!] After several scandals involving takeover artists who broke laws, including Michael Milken and Ivan Boesky, leveraged buyouts briefly went into well-deserved disgrace.
Then the industry rebranded itself as “private equity.” The phrase nicely evokes a group of private investors who, like their venture capitalist cousins, pool their funds and put fresh equity capital into firms. . . . But a better name would be “private debt.” Though they are advertised as super-executives expert at turnarounds of underperforming companies, many private equity entrepreneurs get rich by loading up their target companies with new, tax-deductible debt. As companies whose shares are not publicly traded, private equity firms are EXEMPT from most of the DISCLOSURE LAWS that have been the centerpiece of U.S. investor protection since the 1930s.
Private equity often attempts to cloak itself as a variant of venture capital, but in fact the two have little in common. Venture capitalists actually put THEIR OWN MONEY AT RISK. . . . Private equity entrepreneurs, by contrast, invest mostly in established companies and use the tax deductibility of borrowed money to profit from buying, restructuring, and selling them, often having paid themselves huge fees and special dividends along the way. [Mitt Romney, and ruining the companies in the process.]
Private equity companies routinely use Chapter 11 after they bleed dry the operating companies they acquire, adding debt, extracting capital, and then declaring that, unfortunately, debts exceed assets. Once out of bankruptcy, the companies can be sold for more profit. Bain Capital, Mitt Romney’s firm, pocketed hundreds of millions of dollars as special dividends from companies such as KB Toys, Dade Behring, Ampad, GS Technologies and Stage Storage, all of which subsequently filed for bankruptcy. In late 2012, Hostess Brands, maker of products like Twinkies and Wonder Bread, went into liquidation, having been badly managed by a succession of owners. Well before Hostess filed for bankruptcy in 2012, executives simply STOPPED MAKING CONTRACTUALLY REQUIRED PENSION CONTRIBUTIONS. When the company opted to go bankrupt, employees and retirees had no recourse. Lawyers even have a term for this situation. It’s called “betrayal without remedy.” The phrase nicely captures the double standards in bankruptcy law generally. (p. 200)
The author continues with more information on how, by using “creative ways of walking away from these [pension]debts to their employees and retirees.” . . . . “The legal looting of pension plans led to mass conversions of traditional pensions to 401(k) plans, which are more lightly regulated and put ALL OF THE RISKS onto the retiree.” (p., 201) And OMG it gets worse from there. I mean even worse than you thought. This is really a kind of must read section.
There are several pages (p. 204+) that are so perfectly written, I am going to just type them, despite my desire to put this book down and rest my arms. But given that HILLARY CLINTON as mentioned at the beginning voted for this piece of shit bankruptcy bill (no pun intended) and is running for President trying to pretend she gives a rat’s ass about we little people, I must continue:
BACK TO DEFOE
In the last decades of the twentieth century, the financial industry concluded that what was freely available to CORPORATIONS was too good for the COMMON PEOPLE. The ease of bankruptcy, supposedly, was inviting CONSUMERS to run up CREDIT CARD DEBTS and engage in other forms of PROFLIGATE consumption. The usual business suspects — the U.S. Chamber of Commerce [boo hiss], the Business Roundtable, conservative thing tanks, and above all BANKERS — lined up behind bankruptcy “reform.” Congress passed a harsh measure in 2000, but it was pocket vetoed by President [Bill] Clinton.Elizabeth Warren came to national prominence with her PATH-BREAKING research documenting that the charge of FRIVOLOUS CONSUMER bankruptcies was a red herring. As she demonstrated, most consumer bankruptcies were in fact driven by MEDICAL BILLS that overwhelmed family resources, by the death or disability of a breadwinner or another unforeseen financial calamity, or by the breakup of a marriage. Testifying before the Senate Judiciary Committee in 2005 against the bankruptcy bill, she noted that during the eight years that the financial industry was promoting a harsher consumer bankruptcy law, the number of bankruptcy filings actually increased by only a modest 17 percent, while credit card PROFITS went up 163 percent, to $30.2 BILLION. Over that same eight years, in the run up to the financial collapse, the escalating abuses were on the part of the FINANCIAL INDUSTRY, not consumers. Warren warned:
“Women trying to collect alimony or child support will more often be forced to compete with credit card companies that can have more of their debts declared non-dischargeable. All these provision apply whether a person earns $20,000 a year or $200,000 a year.
“But the means test as written has another, more basic problem: It treats all families alike. It assumes that everyone is in bankruptcy for the same reason — TOO MUCH UNNECESSARY SPENDING. A family driven to bankruptcy by the increased costs of caring for an elderly parent with Alzheimer’s disease is treated the same as someone who maxed out his credit at a casino. A person who had a heart attack is treated the same as someone who had a spending spree at the shopping mall. A mother who works two jobs and who cannot manage the prescription drugs needed for a child with diabetes is treated the same as someone who charged a bunch of credit cards with only a vague intent to repay. A person cheated by a sub-prime mortgage lender and lied to by a credit counseling agency is treated the same as a person who GAMED THE SYSTEM in every possible way.”
However, with the election of George W. Bush and with Congress under Republican control, the banking industry redoubled its efforts to tilt the bankruptcy code against consumers, spending about $100 MILLION in lobbying over eight years. The industry’s bill passed and was signed into law by President Bush in 2005 as the Bankruptcy Abuse Prevention and CONSUMER PROTECTION [!!!!] Act. The law’s key provisions make it MORE DIFFICULT for consumers to file under Chapter 7, under which most debts are paid only out of existing assets and then forgiven, and REQUIRES instead filing under Chapter 13, which dictates a PARTIAL REPAYMENT PLAN over three to five years. The act introduced a means test by which only debtors with income below the state’s median are exempt from the more onerous provisions of the law. If a citizen has above-median income, there is a “presumption” that abuse occurred, and future income is partly attached in order to satisfy past creditor claims, no matter what the actual circumstances. The law also partially OVERRIDES THE HOMESTEAD EXEMPTION that many states provide, limiting the value of the home that can be protected from creditor claims.
In promoting the law, financial executives testified that if losses could be reduced, SAVINGS WOULD BE PASSED ALONG TO THE PUBLIC in the form of LOWER INTEREST RATES. But after the law passed, the credit card industry intensified its efforts to market credit cards with high interest rates to consumers, including THOSE WITH POOR CREDIT RATINGS. Adding insult to injury, the industry invented NEW FEES. Thanks to the “reform,” when overburdened consumers go broke, credit card companies now have far more latitude to SQUEEZE them for repayment.
This penchant for CONDEMNING INDIVIDUAL DEBTORS but excusing corporate creditors and debtors has been rampant in the financial crisis that began in 2008. The corporate campaign to prevent debt relief from being offered to underwater homeowners has relied heavily on a RHETORIC OF MORALITY. Representative Tom Price of Georgia, chairman of the Republican Study Committee, warned extending bankruptcy protection to HOMEOWNERS “rewards those who are living beyond their means,” an argument seldom made about corporations that use Chapter 11.
The double standard continues to this day in the debate over mortgage relief [and student debt relief]. The banks that crashed the economy received over $700 BILLION in taxpayer aid and TRILLIONS MORE in Federal Reserve cash advances and bod purchases. The same financial elites who instrumentally rely on Chapter 11 to rearrange assets and shed debts warn of the shameful improvidence of families caught in a general downdraft of housing values. The strenuous effort of the big banks, with the aid of the U.S. Treasury, to DENY MORE THAN TOKEN MORTGAGE RELIEF to homeowners is both a key double standard in the saga of debt relief and a key source of the EXTENDED ECONOMIC SLUMP.
Basically, punishment and austerity for “bad” people and bankruptcy as a profit making enterprise for corporations. Fucking people all along the way.
“The Moral Economy of Debt” is also a chapter in Kuttner’s 1984 The Economics of Illusion, discussed here and extensively quoted from here.