Is it time for a debt Jubilee?

What's a Jubilee?

In the Jewish and Christian traditions, a Jubilee is a special year marked by a forgiveness of sins, remission of debts and a universal pardon. In Mosaic Law (the Biblical law given to Moses and set out in the first five books of the Old Testament), a Jubilee was to be held every 50th year.

During the Jubilee, each household should recover its absent members; foreclosed land be returned to its former owners; indentured slaves be set free, and debts written off. (Leviticus 25 contains most of the instructions on property rights and debt, as given by God.)

What is its purpose?

To maintain social order and political stability and, ultimately, protect the long-term sustainability of economic life and commerce by preventing credit systems from degenerating into the enslavement of debtors by their creditors.

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In his recent book Debt: The First 5,000 Years, David Graeber, an anthropologist who writes entertainingly of debt ceilings, subprime mortgages and credit default swaps as if they were the exotic practices of a decadent tribe on the edge of self-destruction, notes how the first act of many successful rebellions was to scrap debts and start again from zero. "Cancelling the debts, destroying the records, reallocating the land, was to become the standard list of peasant revolutionaries everywhere." Jubilees were a way of pre-empting such social upheaval in a world where the collateral for debts was the very freedom of debtors and their dependants.

How did it work in practice?

Graeber describes how, in 2,400BC, the Sumerian king Enmetena declared "a general debt cancellation within his kingdom the very first such declaration we have on record and the first time the word freedom' [ie, the freedom of former debt slaves] appears in a political document".

Indeed, the first word for freedom known in any language is the Sumerian "amargi" meaning "return to mother", presumably because enslaved children in particular were allowed to return home. A debt Jubilee is in this sense a recognition that economic life must be socially rooted if it is to be sustainable: in this case a recognition that if debts can't be paid off, they won't be and that it might be better for everyone for the issue to be addressed peacefully rather than violently.

Who wants a Jubilee now?

A surprisingly broad range of people in the US. Graeber is a staunch supporter of the Occupy Wall Street movement. But there are also plenty of more orthodox voices who support the idea of massive debt relief as the only route out of a financial crisis and economic depression caused by excessive debt. Chief among them is the Australian economist Steve Keen. Keen warned correctly in the mid-2000s that the huge build up of private debt would cause an economic crisis far greater than those of the mid-1970s and early 1990s.

What does he say now?

That the sovereign debt crisis is merely a symptom of the real cause of the West's economic woes a catastrophic increase in private debt as a proportion of national income. As a result, the "debt-deflationary forces" unleashed today "are far larger than those that caused the Great Depression". In the 1920s, for example, private debt in the US rose by 50%; in the decade to 2009 it rose by 140%, and the debt-to-GDP ratio is still far higher than when the Great Depression began. The key to averting a second Great Depression now is to slash private debt through a unilateral write-off of irresponsible loans made by banks. And Keen isn't alone.

Versions of a debt Jubilee have been called for by a variety of economists and pundits (including the influential Stephen Roach of Morgan Stanley) who argue that federal policymakers should broker what in effect would be a grand out-of-court settlement between bond investors, banks and consumer groups a "great haircut" to fix the underlying problem of excessive debt and jump-start the economy.

What's the case against a Jubilee?

First, the cure might be worse than the disease, and there's no guarantee that writing off debts would increase economic growth. As Martin Hutchinson and Robert Cyran pointed out on Breakingviews, "every liability is also an asset, so while a dollar that is no longer required for debt repayment might add some cents to consumer spending, it is also a dollar cut out of a bank's capital or an investor's net worth subtracting from resources and confidence".

In other words, any write-offs big enough to alter consumer behaviour would probably also be big enough to destabilise or even sink the banks. Second is the moral hazard argument. Writing off debts encourages future recklessness. Third, there's the worry that international investors would see a Jubilee in America (or any other nation) as an attack on property rights in that country, prompting capital flight and doing more harm than good.

South Park economics

Stephen Roach was arguing as early as last August that debt forgiveness would get consumers through "the pain of deleveraging sooner rather than later" and prove beneficial in the long run. The creators of the satirical cartoon South Park, however, tackled the issue even earlier.

In a March 2009 episode (Margaritaville), one character, Stan, gets a credit card with no limit and uses it to kick start the local economy by repaying everyone's debts. Sure enough, everyone quickly starts spending again. "At the time, the idea just seemed like a funny satire" on America's economic mess, writes Jennifer Ablan of Reuters. "Now it seems like no joke at all."