What is Debt? What is Money?

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This article about the origins of money, and the moral relationship between debtors and creditors is extremely interesting. The comments and responses are very thoughtful and informative. It could form the basis for course all by itself. Moreover, it helps us to think more deeply about some of the problems that have been made visible by the financial crisis.

The financial crisis was the result of actions taken by bankers to increase their wealth. They made loans that enabled households, and or speculators, to purchase homes. They packaged these loans into securities and some to investors. We all know how this turned out. Many of the loans are in default, and the value of the securities that were sold to investors, and held in inventory by the banks, have lost much of their value. This raises questions about how to deal with debtors who are unable to meet their obligations, and how to deal with the bankers who hold some of the debt, and how to recompense investors who were sold faulty securities even when the sellers were aware of their deteriorating value. Numerous legal and moral questions arise about the relationships between debtors and creditors, as well those between creditors and investors.

Governments answered many of these questions by the actions that they have taken or have not taken. They made many decisions that gave priority to the preservation of the banking system. Governments provided liquidity to the banks with loans, and they accepted the toxic securities held by the banks as collateral for the loans. The bad risks taken by the banks were assumed by government and ultimately the taxpayers.

Governments have done less to improve the status of debtors and investors. Banks have foreclosed on those who were unable to pay back the loans and they have been accused of using illegal measures in the foreclosure process. And also despite the fact that many of the loans were predatory. That is, the loan originators took advantage of their superior product knowledge in relation to the mortgagees.

Investors who purchased the toxic products have more power than most households. Many have sued for damages and some have recovered a portion of their losses. Since trillions of dollars of toxic securities were sold, the banks are not in a position to satisfy the claims of the investors. For example, the Florida State Pension Fund lost $60 billion on the securities that it purchased from Wall Street banks. The US government has taken the position that the banks should pay a penalty, well below the total value of losses by investors and households which were damaged by illegal foreclosure procedures. Moreover, that settlement would eliminate any future claims for damages by investors and households. Its fairly clear that the priority of government is to protect the bankers and the banking system.

Most of this information is well known, but the issues that are raised are quite profound. One of the issues is the question of hierarchy. It is very clear that governments have taken the position that the major banks, and the bankers that operate them, have a superior position to that of debtors and investors. Creditors are at the top of the social hierarchy.

Some of the issues also raise moral questions. The debtors are perceived as bad actors, who made poor decisions, and who should be punished for their bad decisions.
Investors are assumed to be rational agents who are responsible for making rational decisions. They were greedy in seeking higher yields from risky investments and they deserve the losses that they experienced. The creditors are a different story. Even though the public has been enraged by the favoritism shown to them by government actions to rescue the financial system, none of the top bankers has paid a penalty for their behavior and they still occupy a place at the top of the social hierarchy. Graduates from our elite colleges still compete fiercely for the opportunity to get internships at Wall Street banks and assume their place in the social and economic hierarchy.

Today, our financial problems are somewhat different but the issues are also the same. Banks made loans to sovereign states that are at risk, primarily as a result of the recession. What is the priority that should be given to the creditors or to the debtor states? Many perceive the states as morally irresponsible debtors who should be punished for their behavior. The creditors who made the bad loans are not perceived in the same way. The IMF, the ECB and many in government place the highest priority on the preservation of the financial system. Most of the solutions to the Euro Zone problems put the burden on the citizens in the debtor states by demanding austerity in return for needed financial support. Creditors have a superior moral and social position relative to irresponsible debtor states.

In any case, the issues that we are grappling with today boil down to questions regarding the nature of money and the moral and legal positions that we hold about the relationship between creditors and debtors and their positions in the social hierarchy.