Understanding debt

Via QuantNet and the Crooked Timber, I found interesting information about a former Yale professor that was allegedly fired in 2005 because of his anarchist political views. David Graeber has just published his book "Debt: The First 5,000 Years" which offers an infuriating insight according to the reviews, including one in the FT. He is currently professor at the London University.

Other interesting interviews include the one in nakedcapitalism.com, an insightful review of Graeber's book by Benjamin Kunkel at LRB, a 6-page article on David Graeber in Businessweek and an hour-long interview broadcasted by C-Span's BookTV.

From the nakedcapitalism.com interview:

So really, rather than the standard story – first there’s barter, then money, then finally credit comes out of that – if anything its precisely the other way around. Credit and debt comes first, then coinage emerges thousands of years later and then, when you do find “I’ll give you twenty chickens for that cow” type of barter systems, it’s usually when there used to be cash markets, but for some reason – as in Russia, for example, in 1998 – the currency collapses or disappears.

Also interesting are a 2002 essay by Graeber in New Left Review and an interview by Charlie Rose five years back.

The FT review includes an interesting paragraph about debt forgiveness and modern creditor protection which I agree 100 percent on:

But in the western world today, governments are intent on protecting creditors, not debtors. What makes the west an outlier, in other words, is not just the presence of credit cards or the existence of virtual credit, but the reluctance of leaders to countenance programmes of widespread debt-forgiveness of the type that used to be found in Mesopotamia.

Can we really blame creditors with an honest heart? It is true that for every sad story of someone getting sick and getting into debt, you have stories of irresponsible spending. Does the citizen deserve to be protected from a self inflicted injury? One can say that there is no moral misconduct of creditors when grating loans. However, this is tricky because there are two overlooked but important points:

• Asymmetric information: lenders are a group of highly skilled individuals that resort to 300 hundred years of mathematical probability, whose organizations are vast collectives of actuaries, quants, fianncial analysts and executives with a lot of relationship to power spheres.
• Fiat money and fractional reserve banking. Inflation depletes the individuals' ability to get in business by their own means and forces them to resort to lenders. At the same time, these lending institutions have an easy access to credit at cheaper rates.

That is what bankruptcy is for. Bankruptcy was pretty revolutionary when it came about. It allows people to make mistakes and in get out of them. If you have too much debt, simply go bankrupt. You won't be able to get a loan and it will mark your credit, but maybe you need a 7 year cooling off period to get your life in order.

He carried out an interesting discussion about his book. Here is an especially stimulating piece:

This summary of my economic theory traces how industrial capitalism has turned into finance capitalism. The finance, insurance and real estate (FIRE) sector has emerged to create “balance sheet wealth” not by new tangible investment and employment, but financially in the form of debt leveraging and rent-extraction. This rentier overhead is overpowering the economy’s ability to produce a large enough surplus to carry its debts. As in a radioactive decay process, we are passing through a short-lived and unstable phase of “casino capitalism,” which now threatens to settle into leaden austerity and debt deflation.

This situation confronts society with a choice either to write down debts to a level that can be paid (or indeed, to write them off altogether with a Clean Slate), or to permit creditors to foreclose, concentrating property in their own hands (including whatever assets are in the public domain to be privatized) and imposing a combination of financial and fiscal austerity on the population. This scenario will produce a shrinking debt-ridden and tax-ridden economy.

The latter is the path on which the Western nations are pursuing today. It is the opposite path that classical economists advocated and which Progressive Era writers expected to occur, given the inherent optimism of focusing on technological potential rather than on the political stratagems of the vested rentier interests fighting back against the classical idea of free markets and economic reforms to free industrial capitalism from the surviving carry-overs of medieval and even ancient privileges and essentially corrosive, anti-social behavior.

Today’s post-industrial strategy of “wealth creation” is to use debt leveraging to bid up asset prices. From corporate raiders to arbitrageurs and computerized trading programs, this “casino capitalist” strategy works as long as asset prices rise at a faster rate than the interest that has to be paid. But it contains the seeds of its own destruction, because it builds up financial claims on the assets pledged as collateral – without creating new means of production. Instead of steering credit into tangible capital formation, banks find it easier to make money by lending to real estate and monopolies (and to other financial institutions). Their plan is to capitalize land rent, natural resource rent and monopoly privileges into loans, stocks and bonds.

Another author with views on debt is Michael Hudson, who has published his new book, The Bubble and Beyond.

See also http://jacobinmag.com/2012/08/debt-the-first-500-pages/

Update: I just found out an oldie entry from mathbabe's blog regarding Graeber's latest book which I will draw a few conclusions from:

1) Debt came before money, often in the form of gift giving (you can read about this in his interview with Naked Capitalism)

2) In ancient cultures, and even in more recent cultures before the introduction of money, there were typically two separate spheres of accounting: the first was for daily goods like food and goats, which worked on the credit system, and the second for rearranging human relationships. Here there were things like dowries and symbolic exchanges of gold, meant to acknowledge the changing human relationship, but not as a “price” per se – because it was understood that you couldn’t put a price on a human.

3) Money as we know it is intricately tied in with slavery because it was when a person became a thing that could be sold for profit that we had a sense of price and when these two separate spheres were united. In particular the existence of money also implies the existence of a threat of violence. Moreover, it is this “decontextualizing” of people from their homes, their communities, and families who are forced into slavery that allows us to measure them with a dollar value, and in general it is only through pure decontextualizing that we can have a money system. It is this paradigm, where everyone and everything has no context, that economists rely on to describe the standard game theory of economics.

4) There are three social structures that people come into contact with in their daily lives and in which they give each other things: communistic, reciprocal, and hierarchical. For example, among parents and children, it is communistic; among a CEO and his workers it is often hierarchical, and among two strangers at a market it is reciprocal.