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Carol Hunt: Debt forgiveness is the only means of kickstarting the economy

Last week, we had the usual suspects on speed dial calling up our national radio stations and roaring indignantly: "But I paid my mortgage/didn't buy a home/never took a foreign holiday/lived on lentils, etc, while yer man down the road bought a new car/holidayed in France/had two houses at the height of the boom, etc. Why should I have to pay for his stupidity/greed/cheek?"

And what had started them off this time?

Those immoral people at the IMF had come, belatedly it must be said, to the rather obvious conclusion that quite an amount of household debt worldwide will have to be forgiven, or restructured, or whatever you prefer to call it, if economies are to have any chance of growing again.

Though it didn't specifically analyse Ireland, the IMF did study the response of a number of countries to situations where large parts of the populations have high mortgage debts, and it found that debt restructuring programmes "can help prevent self-reinforcing cycles of falling house prices and lower aggregate demand".

It also said that "such policies are particularly relevant for economies with limited scope for expansionary macro-economic policies and in which the financial sector has already received government support". That's us on both counts.

So a few enlightened economic experts took to the airwaves to explain to the great unwashed why the IMF has a point and why debt forgiveness is the only way to go.

Firstly, the banks have already been capitalised with money from the public purse, so that's the "moral hazard" argument down the tubes. Secondly, our economy is completely stifled, mainly due to the unsustainable amount of household debt so many families are weighed down by.

Our debt problem is truly frightening. And it's only likely to get worse as more austerity budgets are promised, people have less and less cash to spend and the economy contracts even further -- with more unemployment, more spending on social welfare -- and the debt spiral continues.

Last week the Money Advice and Budgeting Service said it had dealt with a record 7,593 clients in the first quarter of this year alone. Personal debt is by far the most serious problem, it said, with the majority of those in trouble between the ages of 26 and 40 struggling to pay loans, credit card and utility bills because all their spare cash is going on oversized mortgages.

Even worse, many have no hope of ever paying off these mortgages as they're so far "underwater", as the Americans put it (in negative equity), but they're being told that they have to spend the rest of their lives sacrificing everything to that futile attempt. Nor can they sell up without incurring a debt they haven't a chance in hell of paying off.

So, what do we do? Throw them all into a debtors' prison? That seems to be what the "moral hazard" brigade are advocating, regardless of the fact that those people who are currently beleaguered by debt are the young families who spend the most in their local economies. Crush them, refuse to lend them a hand, and you are effectively crushing any hope of all of us getting out of this recession.

The obvious solution is debt restructuring, right? It's what happens in business everywhere. That's the whole point of lending/borrowing isn't it? There's a risk involved; if the lender was guaranteed to get his money back no matter what, the system wouldn't work.

As Professor David Graeber explains in his book Debt: The First 5,000 Years: "Say I were to walk into the nearest branch of the Royal Bank of Scotland and say, 'You know, I just got a really great tip on the horses. Think you could lend me a couple of million quid?' Obviously they'd just laugh at me. But that's just because they know that if my horse didn't come in there'd be no way for them to get the money back. But, imagine there was some law that said they were guaranteed to get their money back no matter what happens, even if that meant ... selling my daughter into slavery or harvesting my organs or something. Well, in that case, why not?"

Graeber is describing perfectly the manner in which so many banks -- not just in Ireland but worldwide -- threw reams of money at people and in doing so artificially inflated the property market. And now they expect us to sacrifice our children in order to pay up.

But it's not only the banks that are out for their pound of flesh, that's what all the indignant callers to Today with Pat Kenny want done. They're insisting that only the debtor -- not the lender -- is responsible for what was originally a two-sided deal.

They've been hoodwinked by the "they owed the money, and surely everyone has to pay one's debts" lie that's told to us by financial institutions so they can keep screwing us for every last penny, until debt do us part. And they don't seem to care that hundreds of thousands of Irish lives are being destroyed by their blindness.

Why is this?

The IMF report said it was due to "friction". Seemingly, the "friction" caused by debt restructuring -- or the implication that some people have to pay for the debts of others -- in the past is one of the reasons why these policies are so slow to be introduced.

Ultimately, what it boils down to is which is more important to Irish citizens: supporting debt restructuring in order to kickstart the economy; or the satisfaction of being able to sit back in your paid-off property, look out on your destitute neighbours and say, "I told you so"?

Actually, maybe don't answer that one.

Sunday Independent