Creditocracy or democracy?

In the 1970s and 1980s, developing countries got caught in a “debt trap” laid by Northern banks and creditors. Rather than enjoying credit that might aid their development, they were condemned to an eternity of debt service payments. Despite international efforts to promote debt forgiveness, most of them are still trapped, and have as a result become either failed or dysfunctional democracies because they are forced to prioritize debt repayments to foreign borrowers over the needs of their own people. 

In the past decade or so, the debt trap has migrated to the North. Sovereign nations in the eurozone, revenue-strapped municipalities, public transit authorities and struggling households are all forced to borrow simply to meet their obligations to creditors. The formula used to trap personal debtors today is much the same as the International Monetary Fund’s formerly controversial lending arrangements to poor countries — loan installments are made so that borrowers can service existing debts, while the principal is rolled over. With average incomes stagnant or falling, households have no alternative but to follow the same path. The likely consequence is that they end up performing a lifetime of debt service to the banks. 

As I argue in my book “Creditocracy and the Case for Debt Refusal,” this is how our financialized society works: The goal is to keep debtors on the hook for as long as possible, wrapping debt around every possible asset and income stream to generate profit. After all, if we pay down our debts entirely, we are no longer reliable sources of revenue for the banks.

We are now well into the sixth year since the financial crash, yet every week still brings fresh headlines about malfeasance, fraud and extortion on the part of the finance industry. The cumulative record of scams is long and grisly: the collusion of bankers in LIBOR rate fixing, their pseudo-forgiveness of phantom debt, their rigging of municipal bond markets, their pursuit of illegal foreclosures, their payment protection insurance ripoff and the mendacity of their collection agents. As crooked as these practices are, it is clear that our elected officials are simply not able to bring the perpetrators to justice. Indeed, Attorney General Eric Holder publicly acknowledged the “too big to jail” doctrine in Senate testimony last year, when he observed that “the size of some of these institutions becomes so large that it does become difficult for us to prosecute them.”  

Over the same period, we have seen a brisk increase in the number of debtors being sent to jail for traffic fines and other minor infractions. It appears that “debtors’ prisons,” first abolished in some U.S. states in the 1820s but not declared unconstitutional until the 1970s, have been staging a return all across the country. We are fast becoming a society in which the largest institutional swindlers are protected from prosecution while those struggling to pay their bills are criminalized and put behind bars. 

In the absence of penal punishment, those who cannot pay are faced with harsh moral censure. Creditors rely on this payback morality to enforce their claims, and it is a deeply ingrained mentality. Civilization will crumble, we are led to believe, if people break their obligations to make creditors whole. But clearly, some debts are illegitimate, or predatory in nature, and probably should not be honored. For the last 15 years, advocates in the Jubilee South movement have campaigned, with some success, for cancellation of the external debts of developing countries. They have developed moral and legal arguments to distinguish between loans that were clearly advantageous to these societies, and loans that benefited only the creditors or inflicted social and environmental damage on families, communities and national sovereignty. The internationally recognized legal category of “odious” debt pertains to loans taken on by dictators and whose costs should not be passed on to the citizenry. But there are also other criteria, relating, for example, to the double-dealing of kleptocratic officials, that have been used to determine whether the loans were really needed, or whether their terms were negotiated with an eye on private profit rather than public welfare.     

It’s easy to understand why taxpayers would balk at footing the bill when the sour outcomes of private speculation get repackaged as public debt, as happened after the bank bailouts, or when dodgy loan products are sold to credulous officials by hedge fund managers. These are questionable obligations to pass on to the electorate, and they probably should be reviewed through a citizens’ debt audit to see which ones stand up and which do not. But should personal loans be subject to the same line of moral inquiry? Are these debts not taken on voluntarily and in full knowledge of the consequences? The answers are not as simple as they seem, especially if they are guided by moral scrutiny of the creditors’ conduct.

The subprime scandal revealed the predatory basis of lending to those who could not make ends meet. The same kind of attitude dominates the landscape of fringe finance, where payday lenders, check cashers and other poverty banks all thrive on usurious interest rates. Making loans that clearly can never be repaid may be a more delinquent act than being unable to pay. Nor is this a situation that applies only to shaking down the working poor. In the past two decades, the condition of permanent indebtedness has penetrated deeply into the middle class, where creditors are knowingly creating debt traps in hopes of turning us all into “revolvers”: the kind of debtors who cannot ever clear the monthly balance but who pay the minimum, along with late fees and penalties, ensuring a steady flow of revenue. 

Most problematic of all are the debts incurred to finance our access to vital social goods — education, health care, shelter and public infrastructure. For most people, these are existential and unavoidable, and are not the result of discretionary choices. Moreover, they could be classed as antisocial debts, because they eat away at the foundations of society. More than 60 percent of U.S. bankruptcies arise from medical debt, and these numbers have not fallen off in Massachusetts since the prototype of Obamacare was installed in that state.  

Student debt, liberally offered to young adults who are not old enough to drink, is touted as the obligatory price to pay for access to a decent, but ever more elusive, job in the knowledge economy. Requiring young people to forfeit an increasingly larger chunk of their future income simply to prepare themselves for employment has been compared to indenture, though it may be more accurate to describe it as a kind of wage theft that lenders, both public and private, wittingly engage in. Debts are, quite literally, the wages of the future.

Our national economic managers are vexed by the prospect of generations of overindebted graduates who will not be able to buy a house, raise children or purchase big-ticket consumer items. But the larger threat is to the workings of an operational democracy. A crushing debt burden stifles our capacity to think freely, act conscientiously and fulfill our democratic responsibilities. Too many young people now feel their future has been foreclosed before they have entered full adulthood. And, given the creditors’ goal of prolonging debt service to the grave, the burden of repayment is shifting disproportionately toward the elderly (many of whom now are routinely asked to cosign student loans). Democracies don’t survive well without a functional middle class or a citizenry endowed with an optional political imagination, and the test of a humane one is how it treats seniors when they outlast their capacity to earn a living wage.   

High levels of indebtedness are typically seen as a drag on the economy, but the costs to democracy are much greater. What share of responsibility lies with Wall Street, or with a government that is so beholden to bankers that it cannot protect, or provide relief to, its citizenry? Figuring out which debts we can legitimately refuse may turn out to be the only way of salvaging popular democracy. The titans of the finance industry will pronounce any talk of economic disobedience to be thoroughly unethical, but perhaps they are the last people to be preaching about morality.