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June 28, 2014

When Madrick points out that debt forgiveness is one of the most important innovations of modern capitalism, he is referring to bankruptcy and the Act’s various chapters. We are best acquainted with “straight bankruptcy” in chapter 7, chapter 11 for business bailouts, and lately (see Detroit and smaller cities), chapter 9 for governments that go broke. All such procedures and relief granted or refused are pursuant to statute. Bankruptcy is not the only form of debt forgiveness; there are other forms of debt forgiveness not covered by the Act. There is debt forgiveness available as between countries on an ad hoc basis not covered by any statute, for instance, and if the reader thinks that is an arcane matter to discuss, consider the view of many that our failure to give debt forgiveness to Germany after WW I accounts or helps account for the rise of Hitler and Nazism!
Given the destruction of Japan and much of Europe and the millions of dead and the disruptions of the world’s economies which destroyed much of old and inherited wealth (as so vividly described by Piketty in his great new book, Capital in the Twenty First Century), the topic is hardly arcane. We turned our plowshares into swords, and when it was time to reverse the process, we had no infrastructure (either structural or human) to make plowshares again in Europe or Japan. The Marshall Plan helped bring about the recovery of our former fascist enemies who were now lying hapless and hungry in an atmosphere of gloom, a gloom amplified by the presence of an expansion-minded Soviet Union on their doorstep. With atomic bombs and the postwar Soviet blockade of Berlin in the 1940s, many of us who were in WW II but were now in college thought we were going to be back for a repeat performance, but this time against one of our former allies.
Europe at this crucial time needed more than occupation by the Allies; it needed capital and rebuilding, not vengeance. All such formerly fascist states had run up enormous debt during the recently concluded war. Robert Kuttner reports in his book, Debtors’ Prison, that Germany before the war had a debt load of 675% of GDP and that after the war the Allies wrote off such debt to a mere 15% of GDP. Why did we agree to such a massive write-off?
Some say that we learned our lesson by the refusal of the French to write off the war reparations the Germans in WW I agreed to pay following cessation of hostilities; that that feature of the hated Treaty of Versailles was the primary reason inflation in Germany ran amok in the 1920s, when the saying there was that “It takes a wagon-load of marks to get a wagon-load of bread;” and that the failure of the French to extend debt forgiveness to their defeated former enemy was a strong factor in providing a grounds for the rise of the savior, a demented paper hanger from Austria named Hitler, who ranted and raved about the Treaty of Versailles as a red meat prop to the masses in one speech after another.
Others say that our write-off after World War II should not have happened because it amounted to a retrospective approval of the financing of the unsuccessful Nazi war effort, simultaneously claiming that such view was not grounded in hatred or vengeance (which they would be loath to admit). Other than skinheads, I know of no one who would approve financing Nazism, but that is history; it’s over. The pragmatist now must (after a deep sigh) say, now what? It was time to shift gears, to feed rather than bomb; to help rather than hurt; to assist rather than undermine. It was a time for a return to sanity and a reinvention of humanity. It was the right thing to do, and we did it. Result? Germany is now a social democracy with a humming and productive economy and a society on the move.
Had such an enormous debt not been all but forgiven and the Marshall Plan had not come to the rescue, German recovery would have been hampered but good; their economy might well have reverted to that of the 1920s while they awaited yet another new (tyrant in disguise) to save them from promises made in their last peace treaty. We will never know; history is linear.
So how important is debt forgiveness as between nation states? Argentina has defaulted before and there is talk that they are ready to default again. Iceland defaulted, nationalized its banks, and now has a thriving economy again, proving that default is not the end of the world; that one may default and survive. So new debt is costlier because one has defaulted? Not necessarily – with a clean slate, one could argue that new debt should be cheaper and, if not, do what is necessary to make your economy hum so that you can finance needed projects from current income. Thus default on debt by nation states and bankruptcy discharges have much in common, but why is this correlation significant?
It is significant because there is now increasing discussion of the establishment of what can be called an international bankruptcy court, one that would handle defaulting nation states’ petitions and bring about debt forgiveness on a global scale. Such a discussion is not new, but with the Argentine and Icelandic trips to and through default, discussions appear to be intensifying. Hope for the establishment of such a court with uniform laws and rules leading to a single system of relief rather than the ad hoc agreements now negotiated with creditors willy-nilly would bring order into the present chaos of debt forgiveness. As the economist Ocampo puts it – Such an agreement between nation states would provide opportunities and mechanisms for debtors to talk to their creditors with the goal of reaching a timely and comprehensive debt restructuring that gives the debtor country economy room to grow.
Ross P. Buckley feels that chapter 9 of our bankruptcy code rather than chapter 11 could serve as a model for sovereign-debt bankruptcies (since it has been used successfully with several cities, including Detroit, which is about ready to come out of bankruptcy from this chapter of the code). Chapter 9 allows debtor-initiated proceedings. Wall Street, of course, which thrives on the opportunities provided by the continuing chaos, has long opposed the idea of an international court in charge of debt forgiveness as between nation states. Twelve years ago William Rhodes, then senior vice chairman of Citibank, defended the consistent efforts of international bankers to oppose such changes. He said, “The existence of a formal bankruptcy mechanism, whether invoked or not, would cause uncertainty in the markets, deter potential lenders and investors, and drive up the countries’ borrowing costs.”
This knee-jerk reaction to a threat to the big banks’ dominion over international debt is pure pap. Per Madrick – The risk of damaging defaults creates much more uncertainty for lenders and an international bankruptcy mechanism would likely reduce interest rates and constrain excessive lending during speculative bubbles. Nations that once tried at all costs to avoid default for fear they might never be allowed to borrow again would now have a way to reduce debt excess without future damage.
International bankruptcy rules for excessive sovereign debt that prevents default? Yes, and especially after Iceland and Argentina have laid waste to Wall Street default myths. Wall Street’s phony concern about higher interest costs? Let’s get real; that’s how they make their money. More pap. GERALD E


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