The Next Round of Quantitative Easing Should be a Debt Jubilee
As part of the 10 Ideas: New Ideas for a New Economy series, a proposal to lift debtors’ overwhelming burdens in order to boost the economy and give them more autonomy.
On March 1st, the international Occupy movement held a day of action targeting the privatization of education. Students at the University of California, San Diego occupied the Chancellor’s Office and released a comprehensive series of demands. Boston students rallied at the capitol building, demanding a reprioritization of public education. Over 80,000 students in Quebec went on strike. At my own school, the University of California, Santa Cruz, a student strike effectively shut down the campus. Four days later, thousands gathered at the California capitol building, taking the rotunda in a scene reminiscent of Madison, Wisconsin a year ago, before being evicted by state troopers. But what lingers once the days of action have settled is a burdensome debt. Since 1978, tuition at U.S. colleges has increased 650 points above inflation, contributing to the nearly $1 trillion in total student loan debt.
Debt loads are high on many Americans’ minds. The Federal Reserve Bank of New York reported that total household debt nearly tripled from $4.6 trillion in 1999 to $12.5 trillion in 2008. Though the figure has since fallen to $11.5 trillion as of the first quarter of 2011, it still an impressive figure. “From 1997 to 2007,” writes the Wall Street Journal, citing Federal Reserve Data, “household debt ballooned to 66 percent of economic output to 98 percent.” Three-quarters of this debt is from mortgages. Student loan debt has also ballooned to nearly three times that of the home mortgage debt during the Clinton administration.
These debt levels are dangerous because they drown consumption. Americans, now paralyzed by a fear of debt, are spending and investing less than they did during 2005. The Wall Street Journal highlighted how “two-thirds of Americans polled online in July by the research firm Absolute Strategy Research said they planned to either reduce their debt within a year or stop borrowing altogether.” The phenomenon cannot be reduced to less access to capital: this hesitation even comes from workers with excellent credit. Workers are contracting demand as they shift from spending to saving.
Students have recently catalyzed around a particular demand: debt abolition. The idea of comprehensive debt forgiveness is not new; in fact, some anthropologists suggest that it is the original revolutionary platform. In times of ballooning wealth inequalities and economic stagnation, demands for a Jubilee, a cancellation of all debts, grow with striking poignancy.
That’s a good place to start in addressing our current problems: immediate relief to debtors. We need another round of quantitative easing that distributes cash to debtors based on a progressive scale of debt held relative to income. (The Fed should accompany this debt relief with its usual purchase of bonds, as it’s essential that the monetary policy trigger an inflationary currency while interest rates sink, so that debtors are aided further.) I’m far from sage enough to specify an amount of capital to plunge into the economy, but the higher the amount of debt abolished, the more fruitful the results.
What makes quantitative easing different from other forms of monetary policy is the direct injection of capital into the market by way of purchasing financial assets, or in this case, debt, from private pocketbooks and portfolios. QE3, targeting debt held by private individuals, should electronically distribute cash to debtors. In order to get a loan one often needs a bank account, so the Federal Reserve will have somewhere to inject the fresh currency. The Bank of England’s exposition on this relatively new form of monetary policy “does not involve printing more banknotes. Instead, the Bank buys assets from the private sector…and credits the seller’s bank account.” The central bank simply creates “new money electronically by increasing the balance on a reserve account.” If it can be done by “crediting the accounts of the companies it bought it from,” then it can do the same to private individuals who hold debt.
In the case of a QE3 Jubilee, the Fed wouldn’t be purchasing a bond or stock, as is typically the case. Instead it would be buying up private debt — but while banks and other loaning institutions hold the debt itself, QE3 would distribute money to those who owe. Why give the money to debtors instead of creditors? There are both economic and political reasons. First, economic: if trends hold, the additional cash will aid savers, incentivizing them to spend more, raising aggregate demand. The only alternative is that debtors defy current trends and spend anyway, which seems unlikely.
Additionally, there are positive externalities of this monetary approach. Quantitative easing both lowers interest rates and prompts inflationary trends. Both conditions aid debtors in their struggle for relief. Expected inflation usually leads to rising interest rates, further burdening debtors, but the Federal Reserve’s lowering of interest rates will obstruct such reactions. The more financial assets the Federal Reserve purchases, the more complete the process of debt forgiveness will be. Aiding debtors also gives them more leverage over creditors, which may force banks into restructuring privately held debt. Banks will want the influx of cash to pay off the assets they hold, encouraging them to court debtors with deals.
There are also political reasons for mass debt forgiveness. We’ve long been experiencing an increased privatization of our lives. Educational privatization began with the massive contractions in state subsidization of public universities. Students, unable to come up with the money for tuition, took on loans. Student loan debt has deterred thousands from entering college and is informing what students study in school and what kind of work they do. Debt is what we accumulate when our substance and savings are not enough, but it puts us in the hands of private entities, i.e. banks. Mike Konczal of the Roosevelt Institute once wrote that it is the job of government to maximize the autonomy of its subjects. The government has an obligation to end this reliance on private actors.
A debt Jubilee at least temporarily removes debtors’ decisions from the whims of the market. It gives them space to practice economic autonomy. In light of the privatization of our decisions, this should be held as an important victory. “Economic development” may mean developing economics that emancipate people’s lives and decisions from an economic calculus.
Ben Mabie, a first year student in proletarian studies, started a chapter of the Roosevelt Institute | Campus Network at the University of California, Santa Cruz last fall.