The European Union's denial of the reality of Greek insolvency is leading to extraordinary political contortions. The leaders of France and Germany recognize that if they don't prevent a default by the Greek government by offering it new loans – which in turn will not be repaid – they will have to bail out their banks again. That could lead to a reprise of the autumn of 2008, when global payments systems almost failed as interbank lending came to a halt. But they can't say this to their voters – better to allow them to be angry at the Greek government rather than their own. Meanwhile the Chinese authorities are sufficiently worried about the world financial system that they have offered support for a new Eurozone bailout, and it isn't as if they don't have their own economic and financial concerns. It is absolutely clear that an orderly Brady Bond style restructuring for Greece, Portugal and Ireland is needed.
Meanwhile, the UK authorities have warned that they've got no idea of the extent of bad loans on property in the domestic banking system, nor whether banks are holding adequate capital against eventual defaults. What's true of banks in the UK economy will be true in the US and Euro area. The financial crisis is not over. Just as in the 1930s, it will prove to be a much longer process to work out than either hoped or feared.
This context makes a new book about debt in America, Debtor Nation: The History of America in Red Ink by Louis Hyman, incredibly timely. The book is largely a history of the evolution of debt from the start of the 20th century, from a small scale phenomenon to the central organising principle of modern capitalism. It traces both the personal opportunities the emergence of widespread debt offered to individuals and small businesses in the US – the fuel of the American dream – and on the other hand the dangers. One of the real strengths of this book is the fact that it sets out in detail the interplay between government action to structure, regulate and grow markets, and the growth of debt. Successive chapters look at key episodes and highlight the paradox that consumer protection was a frequent motive for growing 'formal' debt instruments. There is a lot of informative detail, much of it new to me.
From the 1970s onwards, however, it has become increasingly clear that the overall burden of debt held by US consumers could not be repaid. Hyman does not cite Raghuram Rajan's thesis in Fault Lines that consumer credit became essential to paper over the strains created by growing inequality, but it is certainly relevant. Indeed, Debtor Nation specifically looks at the race and gender dimensions of credit policies.
One of the strengths of Debtor Nation is that it makes clear the role of the state in the growth of the debt-driven economy – albeit a role whose consequences were never fully recognized. For example, Hyman writes: “Mortgage loans may have expanded available housing, but they also taught consumers to owe vast sums of money to impersonal lenders, to say nothing of the long-term devastation exacted on many American cities as whites fled to subsidized suburbs.” (p283) In the end, the Great Society dream of owner occupation ended in the sub-prime debacle.
For Hyman, the key policy question now is whether the 'crisis of over-accumulation' that caused the current problems, as money sloshed around the world looking for a good yield, can be turned to one of capitalism's recurrent eras of investment in new productive assets. (It's a cyclical thesis that has echoes of Carlotta Perez's book, Technological Revolutions and Financial Capital.) He concludes: “The current credit crisis is not really, at root, about credit at all, but about the opportunities for capitalist investment.” (p287)
While I agree with this point, I believe the credit crisis is about credit as well, in the original sense of trust. Trust is fundamental to any economy that gets beyond barter. The increasingly intangible, knowledge-based, globalized economy depends to an extraordinary extent on trust. Trust, in turn, relies on personal integrity and a sense of shared responsibility for the well-being of all. But modern credit has, following its marketization and securitization since the 70s, drifted away from the person-to-person trust that had previously characterized most lending. In that context of large-scale anonymous transactions, the short-termism, greed and irresponsibility of so many people working in finance and large corporations is the ultimate root of the credit crisis. Not only has the trust vacuum not been addressed yet, but most political leaders have not yet found the courage to articulate it. So, to repeat myself, the crisis continues.
