In 2009, Let the Poor Have Debt

Writing about web page http://www.telegraph.co.uk/news/newstopics/religion/3981635/Bishops-deliver-damning-verdict-on-Britain-under-Labour-rule.html

Too much debt is bad. There has been too much borrowing and lending. Now we are all paying the price in bankruptcies and layoffs.

Coupled with that, a big reaction is under way against the idea of debt and the people who make debt possible: the lenders. There's a lot of anger around that is being directed against bankers. There's also a lot of ex post moralizing: the recession is poetic justice, collective punishment for past collective excess.

It's transparently obvious that we need to adjust to some painful lessons. When they created assets or bought assets that others were selling on, many bankers forgot about exercizing due diligence. They misunderestimated the risk. Those that made the biggest mistakes will have made the biggest losses, so the market has now delivered rough justice. The trouble is that, because market justice is rough, we will all suffer with them.

How far should we all adjust? When people are in a fix and feelings are running high, reactions can go too far. Over Christmas there has been a lot of opinionating about debt. Interviewed before the holiday on Radio 4, the Archbishop of Canterbury said that debt cannot be the foundation of sustainable prosperity. Although he agreed it would be "suicidally silly" for him to start dispensing economic advice, this did not stop five other Anglican bishops from issuing a Boxing Day fatwa against the "buy now, pay later" society.

So, it's time to speak up for debt. Too much debt is bad. But too little debt is bad, too. Even today, if you look at economic conditions around the world, it's almost certainly the case that the damage caused by too little debt hugely exceeds the suffering caused by too much of it.

How's that?

Scattered around the world are many profitable investment opportunities. Many of these are in poor countries; these countries are poor, precisely because many opportunities are not exploited. The poor can see many of the opportunities just as well as the rich -- in fact, often enough, better than the rich, because the opportunities are close by where the poor live: the returns to educating children and to small enterprises, for example. But can the poor take advantage of these opportunities?

It's easy to see how the rich might jump in. After all, they are rich and can afford it. The rich might not want to, though. For one thing they may not see the opportunities hidden in the midst of poverty. For another, they may not see how to make a profit for themselves; it takes a philanthropist to want to educate a stranger's daughter, or fund a competitor's business.

So, if the rich people don't jump in, what about the poor? The problem of poor people is: they're poor. 

The only way the poor can take advantage of these opportunities is by borrowing. The poor need to be able to go into debt. 

In fact, often enough, it is being unable to incur debt that keeps the poor in their place. While the poor cannot borrow, their children stay illiterate, their land stays unfertilized, and their talents remain idle.

In 2006, Muhammad Yunus was awarded the Nobel Peace Prize for his work in bringing debt to the poor. Here are the opening words of the Prize Committee's citation. "Professor Muhammad Yunus established the Grameen Bank in Bangladesh in 1983, fueled by the belief that debt is a fundamental human right. His objective was to help poor people escape from poverty by providing loans on terms suitable to them and by teaching them a few sound financial principles so they could help themselves."

(Oh -- I changed one word in the quote. Where the original reads "credit," I wrote "debt." You can check the original here. Get the difference? Bring "credit" to the poor -- you're a saint. But those who bring "debt" to the poor -- which is exactly the same thing -- are often seen as in league with the devil. Hmm.)

In poor countries, bringing debt to the poor can be immensely liberating. Poor people that cannot borrow are condemned to live in impoverishment and insecurity; they must remain at the mercy of the existing power structures. Debt lets the poor invest; it has the potential to raise the poor above their station and enable sustainable, long-run development. Yes, real development! It's true, investment is risky and not all investments will pay off. But without debt, the poor will lack even a chance of escaping poverty, for it is then certain that the poor will invest nothing and get nothing.

Yes, it's still true that too much debt is a bad thing. But no debt at all is bad too! In fact, it can be even worse!

Again: in rich countries, even poor people would sometimes like the security and pleasure of living in their own homes. They can have it, but only if they borrow. If you don't let the poor borrow, what you are saying is: Hurray for the landlords! Long live buy-to-let! Keep home-owning for the rich! For people who cannot put down the full value of a house, being able to get a mortgage is productive in a real sense: it is productive of things that we all value, of security and family life, in fact, of exactly the same "non-material" values that the bishops think has gone missing from British culture.

No, it's not a great idea to give poor people borrow more credit than they can ever repay. But to go to the other extreme and tell the poor they must wait until they have earned it -- forever, that is -- is Victorian values of the wrong kind.

The main problem our own rich country will face in 2009 and the years beyond is not too little debt. It is the composition of the debt. A huge shift is under way in Britain from private debt to public debt. Households will tighten their belts, reduce their outgoings, pay down their mortgages, and rent new homes instead of buying them. As a result, private net indebtedness will fall.

Meanwhile, the government will splurge on unemployment benefits, housing support, and capital projects. Because of the expected fall in tax revenues, the government will pay for it by borrowing. Public debt will balloon. While short term interest rates are now at an all time low, long term rates will remain high. In the future this will be a barrier to renewed growth of private indebtedness.

And that's a good thing! When anyone borrows, they should do so in the expectation of a personal gain that exceeds the interest rate; otherwise, don't do it! Making everyone, rich and poor, leap over a higher interest rate hurdle before they borrow is not a bad idea when the problem has been too much debt.

But that's just to ensure that debt performs its proper function: to sustain development. If the poor are to participate in development, they must be able to borrow. The poorest places in the world are the places where the poor cannot borrow.

Mark Harrison : 30 Dec 2008 14:23 |  Tags: Economics Keynes Recession |  Comments (0) |  Report a problem