TED Conversations

Carsten Sprotte

Founder and President, ParisSharing

This conversation is closed.

Debt forgiveness, orchestrated across our modern economies, may be a plausible alternative to our current debt dilemma.

The looming Greek default threatens to undermine our entire economic system Financial markets are panic-stricken. Maybe we need to start thinking outside of the machine that operates us. Perhaps the entire debt structure of our modern civilization is just not sustainable. Perhaps, beyond a certain level of debt, the lender must share responsibility with the borrower for the consequences of excess. This is, in fact, a very very old idea. What do you think?

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    Nov 5 2011: Wow, only 2K chars. I'll try. I see that you have an educations in economics, that will probably help me ;) As you probably already know, Carsten, reality isn't entirely captured by accounting. Alas, accounting barely works at representing a company! Nonetheless, live by accounting, die by accounting it is, for your cash flow dictates not the success of your B&B/sharing initiative, but it surely has an influence on its short term and long term sustainability. Given your education ,you probably have at very least attempted to factor the possible costs in the prices of the houses, factored the offer of the competition, have evaluated the possible demand and target audience, and so on. Or maybe, you guys just agree on a price with the owners and "keep it simple", knowing that no matter how sophisticated, no model will be able to factor in all the possible costs and problems. Now let's hope that it never happens, but all of the sudden 10 clients default, let's imagine you are acting as the administrator of the various cash flows incoming from rents, and that you are short of money. You have a lot of explaining to do, to the banks that are not in mood for forgiveness, to the house owners that need the money to pay their bills, and so on. Hell of Black Swan isn't it? As you worked in HR, you know how irrational an human can become in a snap! Indeed the lender should also bear the responsability (risky leding = you got it wrong, pal, shame on you), but what if the lender, anticipating this panic event, has placed a bet to cover his ass (exactly because of his risky habits) and is now obliged to pay? Enter undergulated swap contracts and similar instruments, enter excessive leverage and contracts whose language is so archane very few have a complete understanding of their implications. Hence, debt forgiveness, a simple and potentially sensible idea, becomes unmanageable in the short term..it's easier to "blame the market" (invisible hand, remember?) and spread the cost.
  • Nov 2 2011: The year of the JUBILEE! Yes. Sure. Forgiving all debt would include debt at every level including consumer debt. It could be an opportunity to redesign our basic systems to make housinjg acquisition, production, consumption, income distribution, trade, property ownership and use, innovation, health and other things work more effectively to achieve our stated, positive goals.
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    Nov 2 2011: Thanks Krisztian for what appears to be very sound reasoning. I'm neither an economist nor a financier and will not challenge any of your explanations. I do, however, wonder if the collective admission of failure is not a necessary condition for the transition to a more stable economic system. It is rather astonishing to imagine that investors would massively abandon bonds, thereby triggering the simultaneous collapse of the very institutions that guarantee their civil liberties (including property rights).
    The proposal regarding debt forgiveness is not my own idea, but one from Austria's previous ministers of finance. See http://wp.me/pgaYK-3e
    His case is certainly more credible than mine.
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    Nov 2 2011: the lender does share responsibility. the lender bears the risk of not getting money back. this is exactly what happened in greece, some banks agreed to get only half of the money. recent development puts even that half at risk.

    the problem is exactly this. so far, it was the mantra of financial markets that treasury bonds are low yield but safe. many trillions of dollars across the globe are in various government bonds. if such bonds turn out to be not only low yield, but also risky, investors might flee this market, and leave governments with no funds. which is a problem for many reasons, for one, these bonds need continued reissuing as they mature. the entire public debt relies heavily on the possibility of getting new and new loans every month. should the investors change their mind, bankruptcy is within a month of time. this will happen simultaneously in virtually every government on earth. governments do everything to avoid that.

    evacuating the bond market leads to an additional "problem" of credit crunch (opposite of credit expansion), spiking interest rates, which in turn leads to more credit crunch, and so on, the entire credit pyramid collapses. paradoxically, it can lead to inflation. usually credit crunch leads to massive deflation. but certainly, governments will try everything to keep their bonds' interest rates low, and stop deflation. they will induce inflation to counter it. it can lead to total destruction of currencies, including leading ones, like the dollar and the euro.

    of course, that's a pessimistic scenario. but this is what states try to avoid today. what you propose, basically, is to go ahead, admit the failure, and start salvaging the most out of the situation. but states will never admit failure.

    rothbard's 1st observation about politics: nobody ever retires