A Brief History of Debt

Debtor's Prison: The Politics of Austerity Versus Possibility book cover

A Brief History of Debt

Debtors' Prison: The Politics of Austerity Versus Possibility

Book review by R. Alan Clanton
Thursday Review Editor

Though the economy was already wobbling badly in the nine to twelve month period prior to September 2008, the inescapable meltdown began in mid-September that year. Starting with the collapse of Lehman Brothers, spreading overnight to the insurance giant AIG, and growing exponentially through the rest of their competitors and partners—mortgage lenders, investment houses, banks, insurance companies, Wall Street—the crisis, by the end of ten days, essentially brought the U.S. economy to a halt. Teetering at the edge of collapse, other financial firms were forced into unpleasant mergers, were gobbled up overnight by competitors, or had to swallow huge taxpayer injections. The Federal Reserve and the Treasury Department acted quickly to extinguish the fire, but the damage was already done. The dour prediction of many economists is that the world will live with the effects of this downturn for years, putting it on par with the long period of recession and stagnation of the 1970s.

At the forefront of the ensuing blame game—beginning in the waning months of the George W. Bush administration and immediately inherited by incoming President Barack Obama—was the issue of debt. Nearly everyone was in agreement that easy money had been at fault: too many people being lent too much money on dangerously easy terms. But assigning blame was mercurial since, so it seemed, nearly everyone had in some way benefitted from the bubble before its burst: lenders, stock markets, insurance companies, builders, home remodelers, retailers, politicians, local and state governments, home owners or “consumers.”

While regulators napped, everyone made money, with little concern by anyone for the mountain range of debt.

A new book by Robert Kuttner, business columnist and writer, suggests that our longstanding global issues with debt—a love-hate neurosis perfected throughout the last century and still a part of our cost of life—results in cycles of extreme behavior. The ease with which debt allows us material comforts and facilitates war ultimately conflicts with the dramatic and inevitable downturn when those bills come due. Blame is certain, and someone has to pay for the mismanagement, even if the bad behavior was a group process. The result is sometimes the extreme measures of austerity, imposed politically as a punitive measure on a society deemed undisciplined in matters of spending. Kuttner offers the somewhat provocative view that austerity—at least in this case—is not the answer.

Debtor’s Prison: The Politics of Austerity Versus Possibility (Alfred A. Knopf, 2013) is a brief history of modern economics at work, as Kuttner offers us a highly readable and easy-to-digest summary of global economic processes--including the harsh, punitive costs in the aftermath of World War I, and the world’s political and market realignments in the post-World War II years. Kuttner also traces America’s muscular economic ascent in the middle 20th Century—stunning, dazzling and all-powerful—but still linked inextricably to the double-standard of two market policies, one for the money leaving the U.S. and one for the cash coming in. The cost of the Vietnam War, the unlinking of U.S. currency from gold, and the market shocks and gas shortages of the 1970s triggered a decade of recession and inflation. Kuttner then traces the Big Turnaround, following the Reagan-era, Thatcher-era policies of deregulation which swept even liberals and progressives along on the wave of prosperity and seemed, at times, to imbue the U.S. economy with a resilience bordering on invincibility, even as other markets occasionally struggled with crisis, as in the Pacific Rim downturn, and intermittent bubble-bursts in technology and internet business.

Indeed, the long period of market expansion and growth throughout the 1980s and 1990s, and even in the early aught years, created an economy resistant to even the most severe shocks—sudden spikes in oil prices and the 9/11 aftermath, to name but two examples. Still, Americans coasted comfortably on an ever-larger cushion of debt and a housing and mortgage market which—for a while—replaced blue chips and common sense with gung ho exuberance.

When the bills came due and the crash finally came, there was blame aplenty go around regardless of political stripe. Kuttner suggests that our current downturn does not meet the definition of a bona fide recession; Kuttner prefers to call it instead the Lesser Depression, pitting it historically against the Great Depression of the 1930s. Or, as he suggests, an even better term might be the Great Deflation—since, using traditional models our recent recession began in December 2007 and ended in mid-2009--a pretty standard turnaround time for market corrections or contractions. Kuttner demonstrates that we are experiencing now more closely resembles the long market drought of the 1970s, but without the white-hot inflation.

Throughout the years 2008-2012 this unpleasant mix also included deep unemployment and under-employment, all woven into a fabric of deflating wages and shrinking benefits.

Politically, this was dangerous for both parties, but especially risky for President Obama as we approached mid-2012 and as Republicans saw a White House victory within their grasp. But the job markets improved—some have argued in the nick of time—for the President to take full credit for a return to employment levels close to U.S. employment pre-recession.

A brief warning to our most conservative Thursday Review readers: Kuttner is an adherent of John Maynard Keynes, and, as such, takes a relatively dim view at times of non-policed free markets and Friedmanesque deregulation. In this sense, he is no libertarian; but, as a pragmatist and a realist, he is also clearly no socialist. Too much debt can inflict serious injuries to an economy, but harsh reprisals and knee-jerk austerity measures can create market paralysis and catastrophe.  And as someone with a long career as primarily a writer of business and economic matters, he spares us the arcane details and byzantine complexities of macroeconomics lessons as found in the textbooks, and gives us instead a brief history of debt and its relationship to society over the centuries.

Kuttner covers a lot of ground quickly and in reader-friendly form: from the Judeo-Christian value system of debt and repayment, to the 19th Century, to World Wars I and II, to the European Union and its current brew of problems. Kuttner pays close attention to the events in Greece, Spain and the other troubled economies of Europe, for Europeans may eventually face a more painful market reckoning than those endured at the ends of either World Wars. Kuttner’s book is neither chronological nor sequential; each chapter takes time to step back and revisit the historical framework of each set of problems.

Kuttner also examines the double-standard—morally complex and often misunderstood—of bankruptcy and indebtedness on the macro versus micro scales: major corporations and businesses have the option to walk away from at least part of their debt and their problems, whereas average Americans have no such easy option. Government, once agreed upon by Congress, can spend far more money than it takes in, while those living on Main Street are expected to live within their means. But Kuttner suggests that the current backlash against credit and indebtedness is misguided, and counterproductive to growth, adaptability and innovation.

Kuttner sees Americans—and many Europeans—as haunted by questions of debt, and shows how even our current showdowns and clashes are infused with the moral hazards and value complexities of how we manage debt; the recent and future Fiscal Cliff gambits, riots in Greece and massive protests in Spain serve as prime examples.

Don’t be intimidated by a 300-page book about the economies of debt and the dangers of strict austerity: this illuminating book reads very quickly, and even if you do not completely agree with his conclusions, you will have learned volumes about how we arrived at this point on our economic journey into the 21st century.