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A 5,000-Year-Old Plan to Erase Debts Is Now a Hot Topic in America

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    A 5,000-Year-Old Plan to Erase Debts Is Now a Hot Topic in America

    I personally happen to like old, good ideas like this one.

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    Ben Holland
    Bloomberg December 10, 2019


    (Bloomberg) — In ancient Babylon, a newly enthroned king would declare a jubilee, wiping out the population’s debts. In modern America, a faint echo of that idea -- call it jubilee-lite -- is catching on.
    Support for write-offs has been driven by Democratic presidential candidates. Elizabeth Warren says she’d cancel most of the $1.6 trillion in U.S. student loans. Bernie Sanders would go further -– erasing the whole lot, as well as $81 billion in medical debt.

    But it’s coming from other directions too. In October, one of the Trump administration’s senior student-loan officials resigned, calling for wholesale write-offs and describing the American way of paying for higher education as “nuts.’’
    Real-estate firm Zillow cites medical and college liabilities as major hurdles for would-be renters and home buyers. Moody’s Investors Service listed the headwinds from student debt -– less consumption and investment, more inequality -- and said forgiveness would boost the economy like a tax cut.

    While the current debate centers on college costs, long-run numbers show how debt has spread through the economy. The U.S. relies on consumer spending for growth -– but it hasn’t been delivering significantly higher wages. Household borrowing has filled the gap, with low interest rates making it affordable.

    And that’s not unique to America. Steadily growing debts of one kind or another are weighing on economies all over the world.

    The idea that debt can grow faster than the ability to repay, until it unbalances a society, was well understood thousands of years ago, according to Michael Hudson, an economist and historian.
    Last year Hudson published “And Forgive Them Their Debts,’’ a study of the ancient Near East where the tradition known as a “jubilee” -- wiping the debt-slate clean -- has its roots. He describes how the practice spread through civilizations including Sumer and Babylon, and came to play an important role in the Bible and Jewish law.

    Rulers weren’t motivated by charity, Hudson says. They were being pragmatic -- trying to make sure that citizens could meet their own needs and contribute to public projects, instead of just laboring to pay creditors. And it worked, he says. “Societies that canceled the debts enjoyed stable growth for thousands of years.’’

    Forgiveness was good for the economy, would be a modern way of putting it. In an October paper, Moody’s examined how that might apply if America writes off its student debts.

    Moral Hazard?
    There would likely be a “modest increase’’ in household spending and investment, and eventually higher rates of home-ownership and business-formation, it said. Buying up student loans would increase the government’s own debt -- but “only marginally,” since it already owns three-quarters of them. After that one-time hit, budget deficits each year would be slightly bigger because of the lost revenue from loan repayments, equal to 0.4% of GDP in 2018.

    Critics usually raise two key problems with debt forgiveness. One is about fairness. The other is known as “moral hazard’’: Will write-offs today lead to more reckless borrowing tomorrow? These questions “need to be carefully thought through” for student loans, says William Foster, a senior credit officer at Moody’s and the report’s lead author. “Who would benefit, who would miss out, what attempts at equal treatment there should be.’’ Any plan would also have to address “what the situation would be for the next generation of students with regard to accumulating debt,’’ he says.

    Sanders and Warren plan to remove moral hazard by making state college tuition-free. But they’ve caught flak on the fairness question.

    ‘Bigger Debate’
    A study by the Urban Institute said that wealthier households hold more student loans –- so writing them off would be regressive. Pete Buttigieg, another Democratic presidential contender, wants to direct financial support toward poorer students, saying there’s no reason to subsidize richer ones.

    Economies can skew against age cohorts, as well as income groups. Foster says the idea of debt relief plays into “the bigger debate about prospects for young Americans today: Job opportunities, the cost of education, income levels and slower wage gains since the financial crisis.’’
    The last Democratic administration also got in a fight over debt forgiveness.

    Under President Barack Obama, the government took steps to help underwater homeowners. But it failed to get a measure allowing judges to reduce the principal due on mortgages –- known as “cramdown’’ -– through Congress.

    Democrat-leaning analysts have been arguing about the episode ever since.
    “There were 5 million foreclosures,’’ says Mike Konczal, a fellow at the Roosevelt Institute. “It’s a real stain on the Obama presidency’s legacy. They had access to tools to be able to combat them.’’

    House of Debt
    In their 2014 book “House of Debt,’’ economists Atif Mian and Amir Sufi argued that the economy would have rebounded faster with more writedowns. Larry Summers, Obama’s economic adviser, pushed back when he reviewed it -- praising their analysis but calling the policy proposals nave.

    A few years before the financial crisis, two top 2020 contenders -- Warren and Joe Biden –- took opposite sides in another clash over debt relief.
    Biden supported a 2005 bill that made it harder to get out of debt by filing for bankruptcy -- on the grounds it would curb abuses and help ensure cheaper borrowing. Warren, then a Harvard professor who specialized in household finance, attacked it for punishing struggling families.

    Konczal says that bill reflected a widespread idea that over-borrowing was a result of extravagant “lifestyle problems.’’ In reality, he says, “middle-class families were in a much more precarious situation than was realized’’ -- and relying on debt for the basics.

    Can’t Pay, Won’t Pay
    Forgiveness isn’t the only big idea out there for reducing the economy’s reliance on private debt. Another one is to pay for things like homes or education with instruments that look a bit more like equity, and less like debt.
    Mian and Sufi suggested a type of mortgage in which the lender shares risks if prices fall, and rewards when they rise. Some lawmakers, educators and investors are applying a similar model to college financing too.

    Mitch Daniels, head of Purdue University and a former Republican governor of Indiana, is one of the champions of Income Share Agreements. They work like this: investors fund students, and get repaid -– hopefully with a return on their equity –- when graduates start earning the higher wages that a degree should bring.

    Hudson, the historian, also says equity-financing is better. But he thinks the government should play a role. In a 2018 paper with Charles Goodhart of the London School of Economics, he proposed public-equity funds to help first-time home buyers, students and small businesses. By edging out debt-financing, the authors argued, it could be a modern version of the ancient jubilees.

    “The fact is, debt causes instability for a society,’’ Hudson says. Another lesson he’s drawn from studying credit over thousands of years: “Debts that can’t be paid, won’t be paid.’’

    (Michael Bloomberg is also seeking the Democratic nomination. Bloomberg is the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.)

    --With assistance from Alex Tanzi.

    To contact the reporter on this story: Ben Holland in Washington at bholland1@bloomberg.net

    To contact the editors responsible for this story: Simon Kennedy at skennedy4@bloomberg.net, Sarah McGregor, Margaret Collins

    For more articles like this, please visit us at bloomberg.com
    2019 Bloomberg L.P.

    Linky here.
    james.c.hendrickson@gmail.com
    202.468.6043

    #2
    I keep seeing articles and opinion pieces saying something similar. wiping out debt will spur them spending into the economy and move on and so on. safety nets and baby bumpers on everything. take as much risk and need for research before diving in out..... give everyone a participation ribbon in LIFE.
    I just feel so many of these assumptions do not pan out. All these plans leave out the biggest X- factor human behavior.

    Some of the loudest whiners of student debt that i know personally could pay but just do not want to. Some chose bad degrees and others even with a degree it did not help their general desirability since they tend to alienate co workers and have trouble being team players.

    I read /saw article right next to each other one stating " millennial cannot buy a home they are trapped by debt" and next to it that headline "Builders cannot keep up with the millennial demand for new homes"...... HOW can both be right? well ONE size does NOT fit all.
    Perhaps we should just face facts

    The number of college READY is around 20% of students but colleges accept 58% that apply ( ready or not)
    . As loans became easier to get ... cost went up and up and up. NOT a coincidence.
    Most other "Solve " this or that plans that either give money or wipe away responsibility have NOT helped in the long run. I personally saw more then one person get in over their head by one of these programs to FIX everything.... now they are in WORSE condition then before this HELP.

    People need a first hand example......... not a perfect storm of positivity math problem often used to support these items.

    Some PROFESSORS make upper 6 figure salaries WHY? one politician was a professor making 400,000 for one class a semester? does that seem reasonable?
    Many more take large sums to "research" something often something the average Joe could tell you without a big $$$$$$ grant and flawed hypothesis.

    Many work into their late 70s etc. Not a short career the value of what they are doing is grossly overcompensated IMO.

    if we want to encourage other ways to pay back a DEBT they people signed for, like perhaps corporations sponsoring students for a contract of x amount of years service.
    the premise of an old TV show "Northern exposure" where a town paid for medical school to secure a doctor.

    I recently saw an bill to set something up so some can use PRE tax dollars to pay instead of just waiting to deduct etc.

    We are now in all this talk of giving everyone a do-over like a JR high PE class,
    People seem confused why no one seems to HONOR deals / contracts / NDAs / follow laws or even keeping government secrets.
    Nope all called mistakes....
    yet all these ideas and programs from the ACA to any other issue the biggest enforcement is the HONOR system. no one could make this up it is INSANELY laughable


    So lets get this straight a person not ready for college goes anyway...... takes a nothing degree........ comes out and is competing for jobs with others that just worked after high school and gained skills OTJ.
    Since Some right out of college are not ready but are on ground floor of experience and ability are furious they are not offered middle management with a corner office and because they are not just elevated they throw a tantrum and do not want to PAY a financial contract they entered into.

    They are more then HAPPY to claim STUPIDITY to try to shed themselves of their debt. It is a sad sad world


    Comment


      #3
      My issue with the idea of massive student loan forgiveness is that it's treating the symptom, not the illness.

      The actual problem is that the federal student loan program has no safeguards, no limits, nothing to keep naive 18-25+ year olds from being the dumb (or at least ignorant) kids that they generally are. Right now, you & I (Joe Blow taxpayer) are allowing these kids to borrow far more than they should, spending it on anything and everything they want, with no qualifications, restrictions, or assurance of repayment whatsoever, but expect them to suddenly own up to it upon graduation. It's an ethically (not to mention financially) bankrupt idea. Not to mention the fact that a significant reason that college costs have exploded so much is due to the glut of student loan money that is freely available to anyone with a pulse, which then gets thrown at colleges, which happily grow into those ever-increasing budgets that are boosted by those federal loan dollars. Why is this a surprise? It's basic economics!

      Before I would ever consider supporting ANY form of loan forgiveness, you've got to stop the lunacy first. Reform the program to put responsible limits in place. If the taxpayer is going to fund their college education, we need to do so responsibly, and the nation should get a return on that investment. Some of my ideas:
      - First and foremost: EDUCATE STUDENTS ON HOW TO MANAGE THEIR FINANCES!
      - Ensure they understand what their loan payments will look like.
      - Cap their available loans at the cost of in-state tuition/room/board at their state's university system. Pay loans directly to the school.
      - Only allow loans for degrees in fields of study that are valuable to the nation's economy. We can drive the economy by how we educate our students!
      - Encourage students to consider trade schools as an excellent alternative to college!
      - Require a period of obligated public service -- military, local/state/federal government, medical care, teaching, non-profit, etc. (say, 1:1 for the number of years loans are taken out...or perhaps 2:1 for complete loan forgiveness.)
      - Require automatic payment deductions from their paychecks.
      Bottom line: Take reasonable measures to protect students from making stupid, naive choices, while also protecting the interests of the public vis-a-vis the investment we, collectively, are making in these students.

      Are my ideas draconian? Authoritarian? Probably. But if we (taxpayers) are footing the bill, we should be able to dictate responsible terms. If they don't like it, then they don't need to use the loan program. But if they're willing to follow the program, they'll end up with a meaningful, affordable degree (or a viable skilled trade), some awareness of their finances, and maybe some valuable experience in the public sector (with a guaranteed job/salary right out of school!) before venturing into the private sector or wherever else their career takes them.

      But I dunno... I'm just a guy...
      Last edited by kork13; 12-11-2019, 08:08 AM.
      "Praestantia per minutus" ... "Acta non verba"

      Comment


        #4
        Your thoughts are similar to mine, Kork. We won't allow an 18 year old to buy a drink or gamble, yet we will allow them to take on a huge amount of life-changing debt. The government-backed student loan regulations need reform. There should be limits as to how much a student can borrow and the proceeds need to go directly to the school. So borrowing for tuition is allowed, borrowing for spending money is not allowed. Private student loans should be forgivable in bankruptcy. That will put an end to irresponsible lending practices by private lenders.

        Comment


          #5
          Dave Ramsey made a good point about Student Loans.

          He basically said that if student loans are such a large crisis that we need to forgive the debts, then why are we still allowing new loans to be written?

          Seems like the entire system needs an overhaul
          Brian

          Comment


            #6
            I have a lot of comments about what has been said so far, but I just wanted to point out one specific thing. The big problem with student loans is NOT Federal loans. The limits on Federal loans are actually pretty reasonable. You can borrow $5,500 in year one, $6,500 in year two, and $7,500 in years 3 and 4. So for a 4-year degree, the most debt you're going to have in Federal loans is $27,000 which really isn't that bad.

            The real problem is private lenders. They have no limits. They will lend you as much as you want. The interest isn't subsidized. The rate is higher. And they can't be discharged in bankruptcy. That's where people get into real trouble.
            Steve

            * Despite the high cost of living, it remains very popular.
            * Why should I pay for my daughter's education when she already knows everything?
            * There are no shortcuts to anywhere worth going.

            Comment


              #7
              Originally posted by disneysteve View Post
              I have a lot of comments about what has been said so far, but I just wanted to point out one specific thing. The big problem with student loans is NOT Federal loans. The limits on Federal loans are actually pretty reasonable. You can borrow $5,500 in year one, $6,500 in year two, and $7,500 in years 3 and 4. So for a 4-year degree, the most debt you're going to have in Federal loans is $27,000 which really isn't that bad.

              The real problem is private lenders. They have no limits. They will lend you as much as you want. The interest isn't subsidized. The rate is higher. And they can't be discharged in bankruptcy. That's where people get into real trouble.
              Sorry, I was unclear... I say "federal loans", I mean "government backed" ... The private/quasi-private institutions writing those unsubsidized loans are still protected by the government's backing.

              I didn't immediately think about it, but Petunia's suggestion of making private loans bankruptable (though likely with some restrictions) is a very good one. Force them to shoulder the risk of the loans they're writing.
              "Praestantia per minutus" ... "Acta non verba"

              Comment


                #8
                I agree with several points made, particularly that it doesn't make sense to wipe loans before we fix the lending system.
                I think if you only allow payments to be made direct to the schools, you're giving a huge disadvantage to scholarship students and federal aid recipients.
                I think sometimes the public weighing in with an opinion on this forgets that not all students have parents paying for their housing and sending them a monthly stipend. Some of us chose public schools, worked full time, paid all our own expenses, and still needed to rely on loans to get through, which may or may not have worked being paid directly to the school - sometimes it was needed to foot a $900 textbook bill even though they were purchased used online, sometimes it was for a car repair which was needed in order to be able to maintain full time employment, and sometimes it went toward medical bills because when I was in college, you didn't get covered on your parents insurance until 26 and Red Lobster definitely wasn't offering benefits (not to mention some students' parents don't have insurance for them to rely on at all).
                I also think that continuing to baby (ie micromanage the loans of) college students perpetuates a generation who doesn't know how to manage their own finances when they graduate. I agree lending limits need reigned in, I agree financial courses should be mandatory (beginning well before college), I love the idea of field based forgiveness particularly for teachers and social workers, but I don't agree that these ADULTS need oversight, they need education and life skills and non-predatory lenders. Let's punish those who broke the system and not the victims of it.

                Comment


                  #9
                  Originally posted by kork13 View Post
                  - Only allow loans for degrees in fields of study that are valuable to the nation's economy. We can drive the economy by how we educate our students!
                  Great. So we're going to let the government decide which occupations they are going to value over others? That couldn't possibly end badly. What if we have an administration that is anti-science? How about one that places no value on the arts? Or a team that thinks physical activity is overrated? Good luck finding an ecologist or theater director or gym teacher down the line since those students wouldn't have been able to afford college anymore.

                  And will the list of approved fields of study change every time Washington leadership changes? How much chaos would that cause? Sorry Susie. We know you were told getting a teaching degree was important but now we've decided to focus on engineering instead.

                  Last edited by disneysteve; 12-11-2019, 12:02 PM.
                  Steve

                  * Despite the high cost of living, it remains very popular.
                  * Why should I pay for my daughter's education when she already knows everything?
                  * There are no shortcuts to anywhere worth going.

                  Comment


                    #10
                    Originally posted by kork13 View Post
                    if we (taxpayers) are footing the bill, we should be able to dictate responsible terms.
                    How I wish this were true about any number of government expenditures. Student loans would be pretty low on my list of government spending that I'd want to address.
                    Steve

                    * Despite the high cost of living, it remains very popular.
                    * Why should I pay for my daughter's education when she already knows everything?
                    * There are no shortcuts to anywhere worth going.

                    Comment


                      #11
                      I have 3 kids, one graduated May '19, one will graduate May '20, and my son is a freshman.

                      All 3 had to read and watch video's about getting their Federal Loans, they also had to take a "test" to make sure they understood what they had just read and watched about how loans work. So it's not like these kids are being lent this money with no explanations. This is all required before they can sign their master promissory note.

                      And in our case, the loan money went directly to the school, not the student. Maybe when the federal program first started, the loan money went to the student, but I don't think that is the case anymore (although I could be wrong but it wasn't our experience).

                      Like DisneySteve mentioned the Federal Limit on loans is $27,000 and if they are getting private loans they have to have a cosigner, if they aren't credit worthy themselves, so what about those people? Everyone needs to have some personal responsibility to LEARN HOW THINGS WORK!! I'm sorry, I find myself having less and less compassion for ignorant people! My gosh we live in the 21st Century, information is at our fingertips. Stop whining and educate yourself already, as I for one, am sick of all these clueless people! ugh

                      And another thing, if you're married and your AGI is less than $160,000 (80k for singles) you qualify for the American Opportunity Tax Credit, which you can get a $2500 tax credit on $4,000 of qualified education expenses. Over 4 years that's $10,000 you are getting back from the government to use towards college. What are people doing with that money?? I hope they are using it to pay their tuition, or if they're smart like me, they take the federal loans and use the tax credit to pay the loans off before the grace period ends. All it take is educating yourself a little instead of crying and wanting everyone to do everything for you. And now I better quit, I guess I'm in a mood, sorry for the rant.


                      Comment


                        #12
                        Originally posted by riverwed070707 View Post
                        I don't agree that these ADULTS need oversight, they need education and life skills and non-predatory lenders. Let's punish those who broke the system and not the victims of it.
                        When does anyone define someone as an adult anymore?
                        If you can legally enter into a contract for a loan it is not the JOB of everyone else to run your life to make sure you don't make a bad deal.
                        Yes there are bad actors out there making loans but seriously part of being an adult is researching and making the best deal possible before signing the paperwork.

                        Comment


                          #13
                          Originally posted by disneysteve View Post
                          Great. So we're going to let the government decide which occupations they are going to value over others? That couldn't possibly end badly. What if we have an administration that is anti-science? How about one that places no value on the arts? Or a team that thinks physical activity is overrated? Good luck finding an ecologist or theater director or gym teacher down the line since those students wouldn't have been able to afford college anymore.

                          And will the list of approved fields of study change every time Washington leadership changes? How much chaos would that cause? Sorry Susie. We know you were told getting a teaching degree was important but now we've decided to focus on engineering instead.
                          This is already happening in the welfare programs and to your point it is a disaster.
                          A single mom on welfare I know is now what I can only see as a professional student when she first was going to school the program talks about what career is in demand with likely jobs she did about 75% of that program and the job outlook found the projected glut was almost filled so......... The program had her change her focus to another probable career field and once again this time about 50% through they said the outlook for employment was not as they thought so lets try again.

                          Comment


                            #14
                            Originally posted by Smallsteps View Post

                            When does anyone define someone as an adult anymore?
                            If you can legally enter into a contract for a loan
                            Honestly, I think part of the problem is counting 18-year-olds as adults. Developmentally, you're just not fully matured intellectually at that age. Physiologically, your brain isn't fully developed until around age 25. It should come as no surprise to anyone that teenagers often make poor decisions or don't consider the future consequences of their actions. Unfortunately, the law treats teenagers as adults and gives them the right to sign those contracts. I'd love to see the "contract" age raised to 21.
                            Steve

                            * Despite the high cost of living, it remains very popular.
                            * Why should I pay for my daughter's education when she already knows everything?
                            * There are no shortcuts to anywhere worth going.

                            Comment


                              #15
                              Originally posted by disneysteve View Post

                              Honestly, I think part of the problem is counting 18-year-olds as adults. Developmentally, you're just not fully matured intellectually at that age. Physiologically, your brain isn't fully developed until around age 25. It should come as no surprise to anyone that teenagers often make poor decisions or don't consider the future consequences of their actions. Unfortunately, the law treats teenagers as adults and gives them the right to sign those contracts. I'd love to see the "contract" age raised to 21.
                              Honestly age is not a measure of maturity ..... 16/ 18 /21 or 25 .....some are responsible and ready at an early age and i know some past 40 that could not make a smart & responsible decision if they were given 3 chances.

                              Comment

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