Clarification of Debt Forgiveness

Happy Joel (of www.happyjoel.com and Jay Leno fame) wrote to me: "I mean, why is debt forgiveness such a viable option to massive American companies who have squandered an industry advantage through years of stuck-in-the-past decision making, but such a taboo thing to talk about when referring to nations that have no real means of making back the money they owe something like the World Bank?

Debt forgiveness is fine when it's tethered to a forced change in behavior. You forgive 20 bucks from a child as soon as they prove they can get a job and start earning for themselves. You forgive billions from a company when they prove they'll stop giving massive send-offs to CEO's that have run them into the ground."

First, debt forgiveness that I'm talking about is to the individual, not the corporation. But the individual is indebted to a corporation, not a loan shark, so ultimately the road will lead to the corporation.

In a free market, one can do as he pleases. But as Rodney Dangerfield put it succinctly in Back to School, ideals can only be placed in "fantasy land." The idea, or notion, that I have is to prevent panic, depression, global failure, or World War IV. Everywhere that I turn, the news is pointing the blame at someone, or questioning the merit of one bailout to another and offering no solution. So that is my goal- a solution. I figure the easier it is, the more palatable it can be.

The bailout as it currently stands to my way of thinking is still the trickle down theory where if we help the institutions on the top it will trickle down to everyone else. First, as Naomi Klein (of naomklein.org) brought to my attention the goal of the bailout was for banks to start lending again, but it wasn't written into the new deal, unlike in Britain, and banks are saving their money and looking for acquisitions. Secondly, and most egregious, was the way the bailout was sold to US taxpayer - if you don't pass it, financial Armegeddon is upon us. Very similar to how we gave carte blanche in Iraq - if you don't allow me a free hand in Iraq we're going to have another attack here at home (congress gave up its constitutional role to wage war). Lastly, Paulson is an unelected official who was formerly the head of one of the largest financial institutions involved in this mess and given in writing that he is unaccountable for his actions. A far step from Eisenhower when he accepted the fact that D-Day could have been lost and the failure he would have accepted upon himself. And in conclusion, the market dropped approximately 30% (I could be wrong on this number) after the passage of legislation and is one of the worst sell offs in stock market history and Paulson has changed his mind on what he is going to use the money for. So no, I am not supporting the bailout out package.

My logic is if everyone is in debt, then no one is in debt. But if we start paying off some people and not others with our own taxpayer money then some will be indebted to others. This may not be true capitalism, but how we got to this point wasn't exactly free markets either by the media to the President supporting explicitly the real estate bubble. Yes, free markets should reward and punish those that take risks but when officials who we rely upon for impartiality and accurate information give false statements and are unaccountable then why should the borrower?

The other logic is three subtle items that have been overlooked and need to be considered. A couple of years ago, congress (led by Joe Biden) passed a new bankruptcy law which forbad you to file bankruptcy on credit card debt. And this before we know now what is going on with the consumer and leads me to question the surprised look upon consumer finance companies (the ones that are still in business). The right to file bankruptcy is one of the principles that has made America great, giving an individual a chance to start over. Taking away that right harkens to Dickens and debtors prisons in the UK. Second, getting rid of the uptick rule on the stock exchanges. It's subtle, but our economy is fueled through values placed on equities on a daily basis, so when buyers are deluged with sellers, it's hard for the market to correct itself on a rational (if there is such a thing) basis. Lastly, mark to maket accounting, the way it has been executed appears to be draconian. Not all things deserve daily pricing and if so should have been thought out before this mess began. It is not a shock to government officials that an event like this could occur. A book thAT Henry Kissinger wrote in 2001 described the thought that a financial breakdown could occur. So why wasn't there legislation for a backstop against this occuring?

The US automakers have done everything they could to stay in business. They have large legacy costs due to an inflexible union while their competition is union free. The cost of union labor is backbreaking and led to many industry bankruptcies. I believe the unions are more determined for the automakers not to file for bankruptcy then the automakers themselves. The problem as we have seen is that once unions are broken then the next ring on the latter is human right abuses that we see occurring in developing nations. The rampant inflation that occurred in the 1970s needed to be stamped out and I believe the decision was made to stamp it out through demeaning the labor force. That was the stage that has led to rampant deflation in the cost of goods. If it wasn't for the shift in our economy, downsizing of the government, increasing debt loads, and the creation of the internet and computers, we would have encountered deflation a long time ago. Put shortly, free markets lead to deflation not inflation, which is fine. But if an entire generation is taught to expect higher prices which in turn makes debt cheap and then the rules change, as they are now, it is scary and unethical to allow debts to hang over an entire generation that is not of their choosing.

The good thing about deflation is that things can only go so low. The lowest it can go is to the barter system. While inflation can get as high as it wants and create pandemonium as seen in Zimbabwe and Weimer Germany. I hope this clarifies my current thoughts, which are alway subject to change as nature and the economy are wont to do.

And as Russell Crowe's Ed Hoffman tells Leo Di Caprio's Roger Ferris, in Body of Lies, "Nobody's innocent in this shit"