In recent days, the sniping and blame-shifting has reached cacophonous levels as the urgency for a much-needed second coronavirus stimulus bill has stalled among lawmakers in Washington, D.C.
Pelosi and her crew want $2 trillion. McConnell and his fractious posse counter with a ludicrous $300 million. The bipartisan Problem Solvers Caucus—the voice of reason—floats a clearheaded $1.5 trillion compromise that both sides reject out of hand. (Though, as Problem Solvers Caucus member Rep. Chrissy Houlahan pointed out in a Citizen event this week, our narcissist-in-chief may have endorsed the compromise in a Tweet, so stay tuned.)
Meantime, in the pages of Democracy Journal, there he is again, Philly’s preeminent Renaissance Man Richard Vague, his commitment to reason and fact and fairness so intact that he floats above the partisan divide.
Vague’s piece last week, It’s Time For A Debt Jubilee: Why freeing American households and businesses from crippling private debt would be a boon to the economy, brings a level of insight and research to our fiscal crisis that you just don’t hear on the House or Senate floors, or on the cable news airwaves. In those forums, the argument centers around to spend or not to spend, with fingers held aloft to judge the political winds all the while.
That’s because our elected leaders and self-anointed pundits are all captive to something political scientists have called the Overton Window: the limited range of policies that are deemed politically acceptable to the mainstream population at any given time.
Despite countless case studies of late that have shown just how amenable the electorate is to suddenly embrace once-out-of-the-mainstream ideas, (gay marriage, recreational marijuana, Medicare for All), those who are elected to lead tend to live in fear of going outside the window.
Vague is a folksy Texas native with a droll sense of humor, and his only constituency is common sense. He could care less about Overton and his window.
“It’s just math, folks,” he likes to say when explaining the policies unearthed by his years of research. After reading his latest treatise, I reached out to have him walk me through his thesis, and how it would both jumpstart the economy and address inequality.
First, the background.
Today, you may know Vague for underwriting the groundbreaking gene therapy cancer research of Penn’s Dr. Carl June, or for his remaking of the Fringe Festival, or for his post-2016 election odyssey that found him conducting focus groups with middle-class voters across the country, or for his role as the state’s secretary of the Department of Banking and Securities.
But back in 2009, in the aftermath of the Great Recession, Vague was stunned to hear the debate center on public, and not private, debt. Liberals argued for federal stimulus dollars and conservatives trumpeted budget austerity. On the campaign trail, politicians debated a 3-percent hike in the income tax rate.
Vague, a onetime banker himself, saw it all as political theater pretending to be economic problem solving. So he hired his own band of heterodox economists—not to mention another team to poke holes in his team’s findings—and he unlocked the key to predicting economic calamity.
Debt Jubilee is by definition a powerful stimulant, and it disproportionately helps those who are burdened the most by debt.
He found that, throughout history, economic collapse has virtually always occurred when private debt grows by more than 40 percent in a decade when combined with a nation’s private-debt-to-GDP ratio exceeding 150 percent.
In other words: When private debt gets to a certain level, it can topple whole economies—as it has here during the Great Depression and Great Recession. It was a fiscal smoking gun.
Vague’s presentations to policymakers and politicians encountered a lot of agreement—until he got to his cure: Jubilee, a term used for household debt forgiveness decrees in ancient Israel, Egypt and Babylon. That’s right, Vague’s modern-day Jubilee would consist of widespread debt restructuring. In other words: the forgiving of consumer and business loans.
That runs right into the economic article of faith known as “moral hazard”—that such a “bailout” would give rise to a nation of deadbeats.
Vague thinks that reaction is about emotion—as opposed to simple math. “When I say that, mathematically, the best way out of this trap is debt restructuring, people freeze up because they think of not paying your bills as a sin…” he told me when his book, The Next Economic Disaster: Why It’s Coming and How To Avoid It came out six years ago. “Debt is a contract. Contracts are restructured all the time. My entire career in banking, we had a loan-restructuring group.”
When I suggested that Vague’s boardroom buddies must be quaking in their Ferragamo’s, he laughed mischievously. “It’s in the best interest of those who have capital for there to be a belief that not paying a loan back is a sin,” he says.
Now Vague’s back, and he’s updated his argument for these dire times. When I caught up with him this week, we began by talking about the idea that forgiving debt is actually a way to boost growth and address inequality at the same time.
Larry Platt: You’ve been writing about the perils of debt and your Jubilee cure for about six years now, and we’ve talked about this before. But having read the Democracy Journal piece, it seems like you’ve advanced your thinking.
Richard Vague: As you know, we’ve spent a disproportionate amount of time on this, and this article is the culmination of all that. Within days, I heard from a serious publisher about turning it into a book, so maybe people are starting to listen.
LP: Well, and maybe that’s because you’ve tailored the message to this particular moment. It’s interesting to me that you posit your Jubilee argument as both an economic stimulus and a policy that can redress economic inequality. How so?
RV: The private debt epidemic has disproportionately affected minority communities. When you look at inequality, one component is the increased debt burden on consumers outside of the top 10 percent of wage earners. Generally, from the 1980s forward, we’ve had flat wage growth, and that coincided with rapid growth in consumer and business debt.
If I’m the consumer, and I make $50,000 and I have $25,000 in debt, say for college or a medical emergency, trying to pay the interest on that—much less the principal—means I’m not spending on other things. Restaurants, vacations, additions to my home, big screen TVs —I have far less to spend on these things. You get rid of my debt, and that immediately translates into spending more.
Debt Jubilee is by definition a powerful stimulant, and it disproportionately helps those who are burdened the most by debt. You can spend $1 trillion on infrastructure, or you can forgive $1 trillion in debt—both are similarly stimulative.
LP: Are there precedents for the type of Jubilee you’re proposing?
RV: Of course. We did it with Germany after World War II. We just wiped the slate almost clean, which positioned Germany for a rapid recovery and turned it into a manufacturing powerhouse. Now, many of those who were ultimately paying for that debt forgiveness were the ultra-wealthy and major institutions, but that’s very different from what I’m saying. I’m not proposing punishing anyone.
Also, in the early ‘80s, many S & Ls held mortgages with significant losses, and they needed to sell those loans to get rid of their negative earnings. Well, regulators said you can sell at a loss and spread it out over 10 years. Selling underwater mortgages ended up saving the S & L industry.
We did the same thing in a less formal way with Latin American debt in the late ‘80s. New York banks lent to Third World Latin American countries and the loans started going bad. The normal rules would have meant all those banks went under. Paul Volcker, who headed the Federal Reserve, said, “You know what? We’ll look the other way for a few years,” which provided the benefit of time to deal with the crisis. Banks were able to build up earning shares and could write down debt. That’s what I’m saying now—let’s use time as our ally.
Republicans take care of the wealthy, Democrats take care of the less fortunate, and there’s no one taking care of the average citizen, who just keeps getting squeezed.
LP: And that’s because you’d allow banks to write off the forgiven loans over 30 years.
RV: That’s right. Spread the pain so you don’t feel it.
LP: When you first started talking about Jubilee, it was far outside the Overton Window. But now not so much, right?
RV: You have the emerging far left believing increasingly in broad debt forgiveness—Bernie Sanders has been bold on this. It’s gotten a positive reaction from part of the Democratic constituency. But it still raises the snag of fairness: Wait, you’re going to erase everybody’s student debt? In my focus groups with middle-income taxpayers, I encountered it all the time: “I worked hard and paid off my debt.” People feel like they played by the rules, and now here we come talking about forgiving other people’s debt and they feel like suckers.
LP: But you’ve now at least addressed that.
RV: That’s right. We need to create the fairness. That’s why I propose that, in order to qualify for student debt forgiveness, the borrower perform some significant civic service or charitable work. To have an underwater mortgage forgiven, the borrower is required to give to the lender some percentage of the gain on any subsequent sale of the house.
LP: So it’s forgiveness for some equity.
RV: That’s right. Now, when you talk to folks about this, their reaction is closer to, “Okay, I can live with that.”
LP: There’s a deal. It’s not just a handout.
RV: That’s right. Keep in mind, a lot of folks are truly struggling. They’re not being irresponsible; they’re great citizens. These are families making $125,000. That was one of the main takeaways of all that work I did with those focus groups—Republicans take care of the wealthy, Democrats take care of the less fortunate, and there’s no one taking care of the average citizen, who just keeps getting squeezed.
LP: Where do you stand on Universal Basic Income or Guaranteed Basic Income?
RV: Randall Wray is the leading light of the Modern Monetary Theory folks. They have a thoughtful UBI program. They carefully set the wage net below what the market is paying—
LP: Meaning that, as in Stockton, California, it’s a few hundred bucks a month, right?
RV: That’s right, it sets a floor, yet keeps a relatively large constituency out of despair. I don’t object to that, but what I’m focused on is using debt restructuring to help the average working American.
LP: Perhaps the newest idea of yours is that you’ve come up with a funding mechanism for Jubilee, and it’s one that wouldn’t take on more debt. What are U.S. Treasury Perpetual Certificates?
RV: There is all this loose talk about how the government can just print money, but that’s not true since money is always created by debt. If the government wants to spend $1 billion, it sells $1 billion in Treasury bonds to banks. These bonds pay interest and have a maturity.
I’m suggesting a new type of security the Treasury could issue that the Fed would purchase that would pay zero interest and that never matures. So the Treasury can issue a security that the Fed buys at zero interest and that never matures. It’s a perpetual certificate and it’s more like capital than debt.
LP: And the benefit of this would be that we’d be breaking what you call the paradox of debt?
RV: Yes. It’s a vicious cycle: Higher debt curbs spending, which constrains growth, which suppresses wages, which constrains spending even more. All money in today’s world is created by debt, because when you lend, you create debt and money. Modern economic systems are fueled by debt; they’re not misbehaving. It’s built into the system. Debt to GDP has doubled since the 1950s. It’s just the way the system is designed. So, as long as money is only created by debt, we need to figure out a structural way to address debt accumulation.
LP: Are there any precedents for using Perpetual Certificates? And what’s the down side?
If I’m a politician, I’m all over this, because nobody loses and everybody wins. Individuals get out from debt, lending institutions get to clean up their loan portfolios, and the economy takes off.
RV: There are plenty of precedents. It’s how we funded part of the Civil War. As for the down side, many say this will be inflationary, but not in proper doses.
LP: Another strategy I haven’t heard you talk about before is dealing with our bankruptcy laws.
RV: We need more lenient bankruptcy laws. Bankruptcy is a safety guard on the system, but, right now, if your mortgage is underwater you can’t discharge the excess portion in bankruptcy or or you can’t discharge student debt. That’s absolutely insane.
LP: I know you’ve had a long relationship through the years with Joe Biden. I wonder if you think your out-of-the-box thinking might get a hearing if he’s elected?
RV: I hope it would get favorable consideration. If I’m a politician, I’m all over this, because nobody loses and everybody wins. Individuals get out from debt, lending institutions get to clean up their loan portfolios, and the economy takes off. Looking around, I can’t see any losers here. You’d think a politician would like that.
LP: There’s definitely been movement toward your position. When the Fed and Congress acted early on and passed the CARES Act, there was some Vague-like thinking in it, like the forgivable PPP loans and the $1,200 checks.
RV: I have to tell you, I was so gratified by Congress’ and the Fed’s quick response. The Fed was bold—Chairman Powell might go down in history as one of the great Fed chairs. But let me tell you, now the second guesses and the finger pointers have come out in force, and we’re at a stalemate again.
LP: What can the average citizen do to help turn that around?
RV: Learn about these issues and get in touch with your elected officials. We need citizens demanding productive forms of Jubilee!
This conversation has been edited and condensed.
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