I have been watching Joe Biden navigate the political waters around debt forgiveness with mixed feelings. On the one hand, I would be a beneficiary because I have a student loan and to be able to not have to pay it back would be an incredible boon–it is a rational economic decision to favor debt forgiveness. But on the other hand, it is an insane solution to an insane problem.
Debt forgiveness, in general, is an ancient practice. In the Roman Republic, the poor would periodically find themselves saddled with multi-generational debts–debts that ones children and grandchildren would be on the hook to pay back. The holders of this debt, the rich, would get richer and richer and hold more and more multi-generational debts. Debt abolition would periodically reset the slate, though it was obviously unpopular with the rich, it would create great favor with the voting poor.
In a strict accounting sense, debt forgiveness seeks to clear your balance sheet of a liability and clear the holders balance sheet of a receivable. This could be accomplished through cash payments–the government pays your debt. This creates the problem of a high money supply and inflation, because the debt problem has been solved by flooding the economy with cash. Another way this could be accomplished is through magic: the receivable disappears and the liability disappears and we call it even. This has the effect of giving you whatever you bought with the loan for free, and this has the effect of harming the lender who is not compensated for your purchase on credit. This obviously disproportionately benefits borrowers and harms lenders.
The problem this is intending to solve is the “Student Loan Crisis”. There are billions (if not trillions) of dollars of student loan debt outstanding right now. This problem did not just happen. Student loans were nationalized, which means the United States Government is the primary holder or guarantor of most student loans. This had the effect of telling academia that student loans were a gamble it is impossible to lose: Students can borrow whatever they want, and the government is backing it up. What is more: because the government is backing these student loans, they are not dischargeable in bankruptcy. There is no way students can avoid paying back these loans, and there is no way academia can not get paid. The rational economic decision at this point is to gradually ratchet up tuition to maximize guaranteed earnings. Academia became about maximizing enrollments and not maximizing productively employed graduates. The financial incentives were off.
Compounding this problem is modern conceptions of Usury. Full recourse lending means that students livelihoods were on the hook–the fact that the debts were not dischargeable in bankruptcy meant that these were multi-generational debts–debt holders can go after your earnings, your car, your job. The debts are unsecured with collateral so everything that you are secures the loan. These are the reasons the problem itself is insane.
The solution is insane because it fails to solve the problem, but much like the ancient Roman Republic simply resets the slate, hurts lenders and benefits borrowers, and allows the clock to reset and resume counting down for the next time debt explodes to unreasonable proportions and needs to be reset. No systematic or structural changes are made, only superficial ones. It will benefit the borrowers but will not require any new moral standards in our economy.
AMDG
Times-Dispatch of Vichy Earth 