Too Big To Fail: The First 5000 Years

by Daniel on February 25, 2012

One of the many fascinating pieces of information that David Graeber tosses off like shrapnel in Debt is that the first recorded appearance of the word “freedom” in a political document is in a Sumerian proclamation of a debt amnesty or jubilee.

What interested me, however, from the point of view of a professional banker, is that the document in question provided only for the discharge of personal debts of the Sumerians; commercial debts of merchants were not discharged. Clearly (and I suppose there is an interesting anthropological history to be written of the extent to which the appropriate level of cynicism about these things as changed from pre-Christian Mesopotamia to modern London), anyone who could have convinced the Babylonian legal system that his liabilities were all personal debts covered by the jubilee, while his assets were all mercantile trade credits, would have made out like a bandit. The point I am trying to make here is that as well as being the first mention of the word “freedom”, this proclamation marks the first recorded instance of a regulator-sanctioned selective default. Then a lot of things happened including the Fall of Rome and the Beatles, and then we had the FDIC’s decision in 2009 to transfer the assets and deposits of Washington Mutual to JP Morgan Chase over a weekend, leaving holding company creditors exposed to an extravagantly bankrupt shell. So from the start to the beginning of the story of debt, it has always mattered whether or not you were on the right side of what the relevant regulator wanted to accomplish.

Debt is a great book – I don’t think I agree with it at all, but it’s that rare thing – a book that you can have an argument with and more so, the kind of book that you can see is intelligently arguing back. The argument I found myself having again and again related to this particular point – on more than one occasion during the history of debt, it was noted almost parenthetically that a particular debt reform was carried out on the basis “except commercial debts”, and I found myself saying “No! Hang on! Tell me more about these exceptions!”.

And I think this because commercial debts between merchants are a really important part of the story here. Not only are they, in simple numeric terms, a much bigger part of the picture than debts between individuals in social groups, or even tax obligations between subjects and rulers, the fact that trade credits between merchants have generally, even in conditions when other kinds of debt relation were being repudiated, tended to be preserved and honoured, gives us a few clues toward an alternative story of debt over the last 5000 years.
The Babylonian merchants weren’t included in the debt amnesty, of course, because to have upset their trading accounts would have done serious damage to the commercial basis of Babylonian society – to put it frankly, they were too big to fail. In general in the commercial world, the ability to put yourself in debt is a privilege, not an obligation – one of the most important aspects of corporate legal personhood, as an introductory legal textbook will tell you, is not the right to sue other people, but the right to be sued. If you can be sued, then you can enter into agreements with other people that they have confidence that the courts will enforce. And really, in a lot of important technical senses, a debt between merchants is simply a legal codification and recognition of the very basis human ability to promise to do things and then do them. (Parenthetically, I’d note that I do consider it a weakness of the book, perhaps an inevitable one given space constraints, that the word “oath” appears very rarely and “promise” only a little less so. A debt is a promise to pay, and the history of promises seems to me to be potentially very different from Graeber’s history of the debt relation – the Celtic and Nordic sagas are chock full of people carrying out totally extreme actions in order to underline the importance attached to keeping one’s word. Meum dictum pactum (my word is my bond) is the motto of the London Stock Exchange).

So it is noticeable that the concept of “too big to fail” has grown up hand in hand with the concept of the debt relation for the entire traceable history of debt. Although the parallel track of debt as obligation, religion and morality has certainly been there, and is described expertly in the book, from day one it has been recognised among merchants and men of commerce that the point of the debt relation is to serve the organisation and arrangement of commercial need.

To my mind, this fact rather colours one of the central theses of Debt – the idea that debt has from its origins been entwined with slavery, military tribute and imperialism. I’d advance the suggestion that of course the first people to start codifying the debt relation were the first emperors and rulers; they were the first people who ever came across the problem of organising a productive economy larger than a small village or subsistence farming community. The fact that debt has its origins in the creation of tax-collecting, military societies seems to me to be equivalent to the fact that NASA invented Teflon – they had to do it, in order to solve the problems put in front of them.

It’s also notable that actually over the years, debt (by which I mean, the commercial and mercantile kind of debt) has worked noticeably better than most of the alternatives. The dzamalag ceremonies described in the book:

This sets in motion the dzamalag exchange. Men from the visiting group sit quietly while women of the opposite moiety come over and give them cloth, hit them and invite them to copulate; they take any liberty they choose with the men, amid amusement and applause, while the singing and dancing continue. Women try to undo the men’s loin coverings or touch their penises, and to drag them from the ‘ring place’ for coitus. The men go with their dzamalag partners, with a show of reluctance, to copulate in the bushes away from the fires which light up the dancers. They may give the women tobacco or beads. When the women return, they give part of this tobacco to their own husbands, who have encouraged them to go dzamalag. The husbands, in turn, use the tobacco to pay their own female dzamalag partners …

New singers and musicians appear, are again assaulted and dragged off to the bushes; men encourage their wives ‘not to be shy’, so as to maintain the Gunwinggu reputation for hospitality; eventually those men also take the initiative with the visitor’s wives, offering cloth, hitting them and leading them off into the bushes. Beads and tobacco circulate. Finally, once participants have all paired off at least once, and the guests are satisfied with the cloth they have acquired, the women stop dancing and stand in two rows and the visitors line up to repay them.

Then visiting men of one moiety dance towards the women of the opposite moiety, in order to ’ give them dzamalag‘. They hold shovel-nosed spreads poised, pretending to spear the women, but instead hit them with the flat of the blade. ‘We will not spear you, for we have already speared you with our penises’. They present the spears to the women. Then, visiting men of the other moiety go through the same actions with the women of their opposite moiety, giving them spears with serrated points. This terminates the ceremony, which is followed by a large distribution of food”.

… certainly have some attractive qualities, but although Graeber wins the battle against the “Myth of Barter” here I think he loses the war – really, although the discussion of socially embedded exchange is incredibly interesting and illuminating, I think anyone who reads the passage above is going to end up sympathising with the people in the economics department who say that you really can’t organise a modern industrial society on the basis of organising a wife-swapping party every time you want to buy a blanket. Perhaps the fact from the book that will end up resisting the longest against the onslaughts of late nights and Scotch whisky on my ability to recall, is that more or less every urban society in the world has ended up inventing an equivalent phrase to “Please”, and “Thank you”, terms which have the social function of asserting between parties to a commercial transaction that the transaction itself does not embed them in any deeper social relation.

(Another parenthetical note: the only real attempt I can think of to organise industrial production on any other basis from the debt relation is Soviet Communism, and while Soviet production quotas weren’t debts, they seem to me to have had all the aspects of debts which Graeber finds to be pernicious and quite a few more besides. But I don’t really know enough about Soviet Communism to be able to say any more about the analogy, if there is one).

So what might one draw in the way of policy conclusions from an alternative history of debt that traced it down the line of debts between merchants and commercial entities, rather than individuals and sovereigns? Well, I think it would be hard to get very near to the last chapter of Debt. When Graeber points out that the US banking system has loaded itself up with “bad assets”, he doesn’t seem to be recognising that these assets (ie, mortgage loans) are “bad” precisely because there is a governing law which doesn’t enforce the debt contract as a matter of religion or morality, but rather gives US mortgage borrowers the right to hand back the collateral and walk away from the debt. The development of modern bankruptcy codes (and, one has to say, the fairly scandalous changes made to the US bankruptcy code in 2006) has gone hand in hand with the growth of debt in the modern world, and the “modern jubilee” which Graeber suggests is basically the same thing as the “bad debt crisis” which has actually happened.

I’ve repeated myself to a boring extent in the past on the subject of the science of economics being basically a branch of control engineering (“economic cybernetics”, as the Russians called it) which went rogue in the 19th century and got caught up in a whole load of moral and political philosophy that didn’t belong there. Debt as per Graeber’s book is an example of this – the debt contract is basically a tool of industrial organisation that escaped from the laboratory and ran wild. But I think he understimates the extent to which there have always been domesticating influences on the concept, and the extent to which the debt relation has always been, correctly, the subject of revision and reappraisal, with the basic underlying question being that of economics rather than anthropology – “How do we best organise the decision making process with regard to production, consumption, and exchange?”

Having said that, there are some situations where Graeber’s analysis seems completely accurate. Countries don’t have bankruptcy codes governing them, and so in the sphere of international debt negotiations, one can see all the pernicious aspects of the “folk-economics” version of the debt contract that Graeber describes. Looking at the relationship between the European Union and Greece, or even Ireland, one can see that the debt relation is being specifically shaped into a tool for exercising power in a way which would not have been possible through democratic means. IMF programs seem to be typically designed to fail, to put the client country into the position of a defaulting debtor and entirely reliant on the mercy of its creditors. So even though I’d have liked to see the book twice as long and ten times as ambitious, the analysis that it presents is very useful in looking at debt-relations outside the commercial codes that govern most of the world’s actually existing debts, and it’s a very salutary reminder of what happens when people forget that debt is really only (or really only ought to be) the legal system’s best guess at what kind of arrangements would best serve the general purposes of commerce. It is, as Graeber intimates, when the debt relation takes on an independent life of its own that the problems all start.

{ 108 comments }

1

Random Lurker 02.25.12 at 8:29 pm

Small quibble: I think the correct translation of “Meum dictum pactum” would be either “my words are an oath” or “my words are a contract” (since I think that pactum had both meanings in latin). I suppose this makes your example stronger.

2

marcel 02.25.12 at 8:35 pm

Well, you lost me when you made the leap to “too big to fail” but of course you reeled me right back in with the dzamalag passage.

I admit to being mildly surprised that, in connection with, “ I think anyone who reads the passage above is going to end up sympathising with the people in the economics department who say that you really can’t organise a modern industrial society on the basis of organising a wife-swapping party every time you want to buy a blanket.“, you made no mention of Veblen’s “Don’t worry about me, I’ve seen all your wives.” comment.

But return to the TBTF comment. How is excepting commercial credit (or merchant’s credit) an issue of TBTF? I understood the debt jubilees arising from the same perspective as usury laws, that consumer loans are inevitably oppressive, and need to be heavily regulated or you end up with most of the population as slaves. Merchants’ debt is not at all in the same category. Anyway, if you could explain why excluding mercantile credit (and I’m using a bunch of terms interchangeably; if that is wrong, set me straight) is the equivalent of TBTF, I’d be much obliged.

2 other comments.

- Debt, like many other fascinating books, would have been much stronger without its final chapter. I had very much the sense while reading it that it was weak tea, very disappointing after the rest of the book. At least one of your fellow contributors has expressed similar sentiments.

- You wrote: and it’s a very salutary reminder of what happens when people forget that debt is really only (or really only ought to be) the legal system’s best guess at what kind of arrangements would best serve the general purposes of commerce.

Why should debt be what best serves the general purposes of commerce. Seems to idolize commerce, much the way that microeconomics/microeconomists idolize efficiency and macroeconomics/macroeconomists idolize per capita GDP. Both of these things (efficiency, GDP/pop) are fine and good, but they are not goals in and of themselves. It may sound utopian, but aren’t all these things, including commerce, tools for improving human welfare (however defined or measured)? If there’s a way to regulate debt that hurts commerce but benefits human welfare, well isn’t that something that we should be thinking about and discussing?

3

Daniel 02.25.12 at 8:54 pm

How is excepting commercial credit (or merchant’s credit) an issue of TBTF?

In a quite weak, attenuated sense but I liked the title too much to abandon it. The idea here is that the motive for exempting “merchants” is that allowing any merchant to default would have led to a round of consequent defaults by his creditors, and that this is basically the same reason why we have TBTF today.

If there’s a way to regulate debt that hurts commerce but benefits human welfare, well isn’t that something that we should be thinking about and discussing?

in principle yes although I am probably more sceptical than you about alternatives to GDP.

4

Sandwichman 02.25.12 at 9:01 pm

“…the word “oath” appears very rarely…”

How important is this observation? Very. The Tolpuddle Martyrs were prosecuted for swearing an oath, even though unions in 1834 were “legal.” But of course without any recognition of the right to enforce agreements made by union members and even the specific denial of any such right, the nominal legality of unions was nugatory. This insight into the relationship between, on the one hand, debt between merchants and the importance of enforcing agreements and on the other hand the punitive intervention of the state against enforcement in the case of labor unions is illuminating. One law for the master, another for the servant.

5

bob mcmanus 02.25.12 at 9:07 pm

and the “modern jubilee” which Graeber suggests is basically the same thing as the “bad debt crisis” which has actually happened.

So putting the American citizen (and Greece etc) on the hook in future tax liability for umpteen trillion dollars in bad mega-bank debt was the equivalent of a medieval jubilee. Why the heck weren’t the people celebrating their liberation with festivals everywhere in Fall 2008?

I haven’t read the book, but in the examples from Tokugawa Japan the samurai had their personal debts written off (not transferred to the state) and also got to keep their collateral. Only then did the bakufu help the merchants.

6

marcel 02.25.12 at 9:20 pm

Thanks for the answers.

I imagine that the motive for exempting merchants is quite different. One reason is that mercantile credit is not like consumer loans, and is unlikely to become so burdensome so quickly to so many. They are not in the same category. When do commoners try to borrow (other than weddings and funerals, of course)? When times are bad, and they are in no position to bargain because the alternative is so dire in the here and now, rather than the future when the loan is due.

Furthermore, the whole system of commerce could not exist without mercantile credit; on the whole the merchants prefer, at least ex ante to be excluded from jubilees because they would not be able to do what they do. The widespread existence of jubilees in the ancient near east makes me skeptical that this was the case for other commoners, though in the absence of polling organizations we of course cannot know. So your argument is not persuasive (at least not to me).

A couple of other questions that had occurred to me in reading but had fled my head while typing.

1) When Graeber points out that the US banking system has loaded itself up with “bad assets”, he doesn’t seem to be recognising that these assets (ie, mortgage loans) are “bad” precisely because there is a governing law which doesn’t enforce the debt contract as a matter of religion or morality, but rather gives US mortgage borrowers the right to hand back the collateral and walk away from the debt.

Is this unusual? I thought that collateral is advantageous to all parties of collateralized loans. It this trait about mortgages not common outside the US?

2) the debt contract is basically a tool of industrial organisation that escaped from the laboratory and ran wild. Can you elaborate? It’s a delightful turn of phrase, but, like many of Hitchens’ better phrases, I cannot flesh it out when I ponder on it and figure out exactly what it means.

Finally, I suspect that we are equally skeptical about alternatives to GDP, at least as a practical matter, but I do think we should discuss them every now and then, in the seminar room and after, over drinks, to see if it is possible to come up with something practical that is better. Your wording in the post implied that commerce is the be all and end all of human existence, and I was in a young Marx mood when I read it (but it is my intention tomorrow, to be in a young Hegelian mood in the morning, a Kropotkinite mood in the afternoon, a Luxembourgian mood in the evening, a neo-classical economics mood after dinner, just as I have a mind, without ever becoming a young Hegelian, a Kropotkinite, a Luxembourgian or a neo-classical economist.)

7

Philip 02.25.12 at 9:20 pm

Another correction – “seems to me to be equivalent to the fact that NASA invented Teflon – they had to do it, in order to solve the problems put in front of them.”

No they didn’t, Teflon was invented at Kinetic Energy (joint venture of Du-Pont & GM) in 1938. It was used on the Manhattan Project. NASA wasn’t ‘invented” until 1958, by then the French already had Teflon coated cooking pans.

8

Neville Morley 02.25.12 at 9:33 pm

“…commercial debts between merchants are a really important part of the story here. Not only are they, in simple numeric terms, a much bigger part of the picture than debts between individuals in social groups, or even tax obligations between subjects and rulers, the fact that trade credits between merchants have generally, even in conditions when other kinds of debt relation were being repudiated, tended to be preserved and honoured…”

A few pedantic historical quotes that don’t necessarily undermine your overall thesis. (i) At least for the Roman empire and comparable imperial systems of Graeber’s axial age, it is not at all clear that commercial debts would have been a bigger part of the picture than either debts between private individuals or the overall tax take, let alone the two put together. (ii) At least for the Roman empire, the obvious reason why commercial debts would not be included in any sort of relief is that merchants were marginalised and despised. Debt relief was for people who held power in the state (the landed aristocracy) or, more rarely, for people on whose well-being the state depended (the peasant-citizen-soldier class). The evidence suggests that financing of commercial ventures was more or less separate from other credit, so the risks of any contagion were minimal – and would largely have affected other people that the state wasn’t terribly bothered about.

9

Neville Morley 02.25.12 at 9:34 pm

“Historical quotes”?? I meant “historical points”.

10

Antonio Conselheiro 02.25.12 at 9:37 pm

Just a supplement to Graeber, which I haven’t read yet (so he may have mentioned it):

Western traditions are customarily traced back to Athens, and the Athenian tradition is customarily traced back to the reforms of Drakon and Solon ca 600 BC. One of the things these men did was to break the power of the dominant clans by forgiving the debts that made all other clans their subjects. It’s not clear exactly what the system was, but it seems to have been a kind of feudalism in which the debtor clans were like serfs. They technically owned their land, but were so heavily indebted that they were not really free. A high proportion of their product had to be given to their creditors to pay debts which could never be paid off.

The conversion of independent farmers into unfree peasants and debt slaves is more or less a cultural universal in human history, even into the American 20th century (sharecroppers).

11

chrismealy 02.25.12 at 9:45 pm

For me Graeber’s biggest omission was the development of personal bankruptcy.

I’m going to take Daniel up on cybernetics: the lesson of “Large Scale C++ Software Design” is that a system with too many cyclic dependencies will eventually collapse under its own weight. My hunch is that the problem of too much aggregate private debt (and Fisher’s debt deflation) is really a problem of too many interconnected promises. Just wiping out the promises (debt jubilee, or plain old inflation) is one solution, but you could also simplify the network of promises. The postwar boom years had both jubilee (from depression bankruptcies and wartime inflation) and simplification (from financial repression). Replacing debts such as retirement savings and college loans with entitlements would help today.

12

Antonio Conselheiro 02.25.12 at 9:58 pm

I wouldn’t be surprised if, in the aftermath of the bubble collapse, we end up with a substantial group of second-class citizens. The long-term unemployed already seem to be such a class. I’d be surprised if a lot of the underwater homeowners end up with severe restrictions on their ability to do business, get jobs, and even to rent. Credit checks are everywhere now.

13

Antonio Conselheiro 02.25.12 at 9:58 pm

“wouldn’t be surprised”

14

Henri Vieuxtemps 02.25.12 at 10:20 pm

As Brad Dourif says in Wise Blood: in my economy, there ain’t nobody that owes nothin’ to nobody.

15

bob mcmanus 02.25.12 at 10:44 pm

A real Jubilee is simple.

1) All personal debt is written off, zeroed out. Mortgage, auto, credit card, everything. People get title to houses and cars, keep whatever collateral.

2) All government, Federal, State, local debt is written off. Default. T-bills burned as useless paper.

3) Federal government then provides whatever services are required, specifically Social Security, Medicare for All or NHS, national bank for short-term commercial paper. Infrastructure jobs program if there is some kind of capital strike.

4) Hospitals exist, roads exist, tools, education and skills, fields, objective reality will survive, prosper, prevail.

5) Commerce & finance will either come back spontaneously or be rebuilt by gov’t. Or preferably, die a horrible and painful public death.

Jubilee was always a conservative move, to try to preserve the existing social relations under extreme stress.

16

Bill Benzon 02.25.12 at 10:56 pm

4) Hospitals exist, roads exist, tools, education and skills, fields, objective reality will survive, prosper, prevail.

Jubilee was always a conservative move, to try to preserve the existing social relations under extreme stress.

Yep, it all exists. Etc. But I’ll be damned if I know what to make of it. A lot of people (real and corporate) won’t be getting the $$$ they expected and because of that they won’t play along. Is it mere social and imaginative inertia that makes Jubilee seem so ridiculous?

17

yabonn 02.25.12 at 11:09 pm

[...] the fact that trade credits between merchants have generally, even in conditions when other kinds of debt relation were being repudiated, tended to be preserved and honoured [...]

A bit of ill remembered and badly digested legal stuff : at least in my neck of the woods, when a company goes bust, state (and employees) comes first, and all the others can go have a picnic. Conspicuous absence of a big creditor from the picnic may even raise eyebrows. (An aside for the layperson : the one actually always getting paid in this mess is the one in charge of managing the company’s end of life, aha, aha).

That’s the modern way, with legal personality and stuff ; I suppose the state’s hand wasn’t slower in the past – both to take its share and to jail failed debtors, merchant or not. So I wouldn’t rate middle age merchant debt that high, even accounting for all the preserving and honouring. I think I see your point about the significance of commercial debt (though as marcel at 2, I’m a bit unsure when and where TBTF comes into play here), but its seems to me a tooling thing – solving the problems in front of them.

18

David 02.26.12 at 12:18 am

Pedantry: You seem to use Babylonian and Sumerian interchangeably, but Mesopotamia had been overwhelmingly Akkadian for centuries when Babylonia became an empire.

19

David 02.26.12 at 12:36 am

“To my mind, this fact rather colours one of the central theses of Debt – the idea that debt has from its origins been entwined with slavery, military tribute and imperialism. I’d advance the suggestion that of course the first people to start codifying the debt relation were the first emperors and rulers; they were the first people who ever came across the problem of organising a productive economy larger than a small village or subsistence farming community. The fact that debt has its origins in the creation of tax-collecting, military societies seems to me to be equivalent to the fact that NASA invented Teflon – they had to do it, in order to solve the problems put in front of them.”

I wonder how true that is? I believe debt came after militarized city-states, tho there’s a problem of defintions, but surely before tax collection or empire.

20

garymar 02.26.12 at 5:57 am

Pedantry: You seem to use Babylonian and Sumerian interchangeably, but Mesopotamia had been overwhelmingly Akkadian for centuries when Babylonia became an empire.

Pedantry+1: in a previous thread someone even called it Assyria!

Everything gets hazy about 3,000 years out. Sumerian died as a living language but was used for ceremonial purposes for a thousand years, much like Latin in Europe.

Daniel is just being whimsical: the Fall of Rome and the Beatles, etc. The Mongol Invasions and Herman’s Hermits.

21

Scott Martens 02.26.12 at 8:05 am

I agree that the strongest point of the book was it’s historical discussion of debt, while it’s more forward looking conclusion has a hint of old fashioned leftist pie-in-the-sky. The genuine and long standing problem of “how do you make industrial civilization actually work?” is not where Graeber is at his very best.

But I am much more positive about his attack on the notion of “debt-as-sin.” To acknowledge debt as an essential organizational abstraction does not mean having to punish debtors when events go against them. The folk economics of debt-repayment-as-morality runs awfully deep and is incredibly oppressive. People kill themselves over their inability to pay off debts that no morally accountable person would ever expect them to pay. Personal bankruptcy and rebuilding credit is a trauma on par with the death of a loved one.

I’m warmer towards Graeber’s main thesis for exactly that reason: People are destroyed, morally and psychologically, by crushing debt. An instrument that is so unnecessarily destructive of the lives of so many actual people – not business entities but living, breathing, productive workers – demands some form of criticism, if not for moral reasons then because having productive people kill themselves is simply inefficient. I’m occasionally sympathetic to the Islamic interdiction on interest for just that reason – the repudiation of unjust debts should be the moral right of the debtor. Unfortunately, I think Islamic economics focuses too heavily on interest per se and not enough on the idea of just economic relations. Repudiation of unjust debts does not seem to play nearly as big a role as finding ways to pay and receive interest on loans while calling it something else.

22

Peter T 02.26.12 at 10:15 am

Marc van de Mieroop covers debt jubilees in his biography of Hammurabi, the first major king of Babylon. Yes, commercial debts were exempted. The jubilees were aimed at peasantry in debt to tax farmers. Since the tax farmers’ debts to the state were also written off, in effect this amounted to a tax amnesty.

BTW, long-distance commerce and law on debt both pre-date mass slavery, militarism and tribute.

23

nn 02.26.12 at 11:31 am

And really, in a lot of important technical senses, a debt between merchants is simply a legal codification and recognition of the very basis human ability to promise to do things and then do them. (Parenthetically, I’d note that I do consider it a weakness of the book, perhaps an inevitable one given space constraints, that the word “oath” appears very rarely and “promise” only a little less so. A debt is a promise to pay, and the history of promises seems to me to be potentially very different from Graeber’s history of the debt relation – the Celtic and Nordic sagas are chock full of people carrying out totally extreme actions in order to underline the importance attached to keeping one’s word. Meum dictum pactum (my word is my bond) is the motto of the London Stock Exchange).

I don’t know how it worked in ancient times, but today if problems arise, debts (or in fact any other type of agreement) are routinely renegotiated, payments postponed, interests lowered, principals written off and company assets liquidated without chasing owners or executives, their children and children of their children with perpetual payments until the death of universe. If anything, modern commerce is example of system where inability to honour your “oath” (and how to deal with it) is a built-in feature of the whole enterprise. Which, btw, make your nonsensical suggestion that problem with mortgages is people are liable just up to the collateral even more disgusting.

24

Henry 02.26.12 at 11:51 am

bq. Which, btw, make your nonsensical suggestion that problem with mortgages is people are liable just up to the collateral even more disgusting.

nn – I’d recommend that you go back to the OP, and try actually reading it this time kthxbai

25

Alex K. 02.26.12 at 1:12 pm

@Neville Morley, #8

“At least for the Roman empire, the obvious reason why commercial debts would not be included in any sort of relief is that merchants were marginalised and despised. Debt relief was for people who held power in the state (the landed aristocracy) or, more rarely, for people on whose well-being the state depended (the peasant-citizen-soldier class).”

Could you clarify what were the main ways in which a landed aristocrat would accumulate debt?

I can imagine there could be many ways to get indebted in ancient Rome if you’re a landed aristocrat — but my apriori (i.e. ignorant) guess would be that the most usual way to get a big debt was related to the land holdings of the aristocrat.

If an aristocrat holds big debts because he bought too many slaves, or too much bad land, or because he suffered through too many years of bad weather, he would still hold debts because of commercial transactions, even if the aristocrat does not belong to the merchant class.

26

Daniel 02.26.12 at 3:12 pm

I don’t agree that (for example, as discussed in Mary Beard’s “Pompeii”) merchants were “despised” in the Roman Empire. It’s difficult to build a big society based on despising merchants, not least because they tend to have so much money.

I’m warmer towards Graeber’s main thesis for exactly that reason

Yes I agree with Scott here. I’d note that among people who manage debt for a living, there is very little of the debt-as-sin culture – you have to burn your creditors over and over again before you get even as bad a name as Donald Trump, and even he has lots of people who admire him. The kind of rhetoric that portrays jinglemail as some horrible moral failing of character rather than a sensible response to an investment decision that didn’t go right invariably comes from the epigones and wannabes of the banking industry (or unethical PR men employed by it, admittedly), not from the actual bankers. (PS: the answer to the question “but what would happen if everyone handed the keys back rather than suffering to pay the loan?” is “well then the system would be working roughly as it was planned to work, hence that’s way it says so in the law”.)

In many ways (and I think this point is common to quite a few of the articles in this book seminar), an alternative way of responding to the points Graeber makes would be not to go in the direction of a “human economy”, but for more people to treat debts and bankruptcy in the manner of commercial rationality and economics. My alternative title for this piece was “I Knew Homo Economicus, Homo Economicus Was A Friend Of Mine”

27

robotslave 02.26.12 at 3:18 pm

“long-distance commerce and law on debt both pre-date mass slavery, militarism and tribute.”

I’d be interested in a reference, as I believe there’s good evidence that at least three of those things predate history. Are you using “mass” in a way that disallows examples from cultures beneath a given population threshold?

28

Daniel 02.26.12 at 3:27 pm

Long distance commerce I would guess yes, based on all the flint arrowhead factories and whathaveyou. Law on debt I can’t see how that’s possible if I am right in remembering that Hammurabi was the first codified law on anything.

29

F 02.26.12 at 6:59 pm

@7

Yeah, that got me too. Made me wonder if this whole article isn’t just an elaborate parody and the NASA line was a wink at this.

30

Neville Morley 02.26.12 at 7:08 pm

@Alex K #25: predominantly, aristocrats in Republican Rome would get into debt in their attempts at getting elected to public office, which could be incredibly expensive (gifts to supporters, putting on spectacular gladiatorial games, bribes etc.), and hence started on a political career. If successful, they then had the opportunity to make enormous fortunes out of the process of imperial expansion and exploitation; if unsuccessful, they’re in trouble. Classic example of success is Julius Caeser, who ran up unprecedented debts in getting himself elected Pontifex Maximus (chief priest) and used that as a springboard for military success hence profit; chief negative example is Catiline, of the Catilinarian Conspiracy, who began plotting precisely because he’d failed to get elected and had used up his patrimony in trying.

@Daniel #26: with all due respect to Mary Beard, she’s not an economic historian. The theme that merchants are untrustworthy, morally dubious, antithetical to social stability etc. is ubiquitous in Roman elite discourse; the debate has been about the consequences of that cultural prejudice. Not to say that everyone accepted the idea, not to say that the elite weren’t happy to make money out of funding commercial ventures through intermediaries, but it was a prevalent attitude among the ruling class – who were the people deciding on debt relief, after all – and there are very few examples of people making a fortune in commerce and then buying their way into even the local aristocracy, let alone the Senate. I don’t know why you simply assume that the merchants must have been rich; such evidence as there is suggests the contrary, with just a few exceptions. The one thing to be said for the Romans is that, in dealing with merchants for the city’s food supply, they tended to offer incentives (tax rebates, promise of citizenship) to persuade them to sign contracts and supply grain, whereas the Athenians passed punitive laws and prosecuted merchants under suspicion that they’re concerned only with personal profit – merchants were frequently regarded as enemies, who rejoiced at events like famines.

31

Robert Waldmann 02.26.12 at 8:15 pm

NASA didn’t invent teflon “PTFE was accidentally invented by Roy Plunkett of Kinetic Chemicals in New Jersey in 1938. [skip] Kinetic Chemicals patented the new fluorinated plastic … in 1941[2] and registered the Teflon trademark in 1945.[3][4] ” http://en.wikipedia.org/wiki/Teflon.

NASA was* just the first organisation to famously use Teflon serving as out of this world quality product placement.

This is actually central to your point (not snark). We don’t even know if oppressive warmaking imperial monarchs invented debt. It might have been around since 100,000 bce for all we know, but just as one of many not widely used social/protolegal products. Indeed, for all we know, some isolated culture in Papua or Amazonia has debt contracts which they have never managed to explain to anthropologists who don’t know that they are actually trying to ask using the slightly different language of the slightly different culture 3 miles away.

What we know is that said monarchs commanded the first organisations so big that they relied on written communication.

(yes was damnit I am American before I am English (not at all) and I use the singular to refer to organizations)

32

Lee A. Arnold 02.26.12 at 8:57 pm

Debt so big as to need a jubilee, means that another sector has too much money to begin with. We are there, now. The current flight of the plutocracy into sovereign bond safety is symptomatic of much more than a lack of investment opportunity due to the Great Recession (though this seems to be the default supposition of the pundits): The financial sector appears to have too much money at potential growth, too.

Bank assets/GDP went above historical levels by the early 1970′s and the ratio has continued to rocket upward.

Since the days of Ronald Deregulation and the U.S. savings and loan crisis, the financial sector has been blowing regular bubbles, causing crises every 3 to 5 years.

Let’s hypothesize something different: that they have more money than they know what to do with. They are institutionally incapable of making smaller loans (except in standardized contracts like mortgages) and they are constitutionally incapable of considering anything that isn’t high-yield, unless they can bunch it and chop it into high-yield derivatives (which again, needs standardisation). So the amount of money on hand to push into high-yield investments is far greater than the amount of opportunity they find to invest in real economic productivity — even at full employment. So, they have too much money. The “savings glut”. Or in other words, as a business sector, they have too much supply.

If farmers grow too much corn, the price of corn drops. Why may all businesses have price shocks from oversupply, but not finance? Finance is usually described by economists as the necessary business of shifting our savings into loans, along with a bit of explanation about different durations and risks, but that is rather half a definition. Finance is a business which returns our medium of exchange to us, as if it were their produced commodity, and the supply of that commodity is increased by multiplying upon their reserves. (Or not: they clearly prefer that reserves are unnecessary, so long as they can shift “risk” around.) Well, no firm in any business can make a big profit if there is too much supply. Globally there is US$40 to $60 trillion zapping around, fast as electrons, looking for big yields.

Now they are running out of bubbles to blow up, while their yields in the safe sovereign harbors are negative, or almost negative.

The correct solution is redistribution, jubilee. But in today’s terms: let’s have higher fiscal deficits in the short-term to boost infrastructure and human capital (a.k.a. “education”), to get the economy moving again. Then afterward, let’s have a series of slow and progressive tax hikes to pay down deficits until the safety-net programs are long-term robust — which is also, incidentally or double coincidentally, a fiscal policy to reduce inflation from the wage side, and thus also to keep interest rates in check. And perhaps include a charter for a small-business investment bank, perhaps the only one with government deposit insurance.

Plutocracy’s solution, on the other hand, is to push-up interest rates. Look at the chain of events: In the panic, the U.S. Fed printed money to save the bank businesses. Then the banks used that free money, not to write down mortgages, but to buy bonds from the U.S. Treasury. And now? They are hoping for higher interest rates, so the U.S. taxpayer can pay EXTRA taxes to them, as profits on their free money.

It may be no random coincidence that U.S. politicians, particularly the Republicans, are lining-up to give permanent tax cuts to the “job creators” (it is to laugh!) — because they not only reduce their risk of paying for the welfare state, but the messier budget outlook could raise long-term rates. It’s a moneybaggin’ twofer.

Note also, that it is likely that if interest rates stay low for a long time, more financial institutions will downsize or go out of business, because their profit margins are going to shrink below their daily operating costs.

We have entered an historical period of fighting over who will benefit from government debt, and the rhetoric should describe exactly how the austerians intend to reap their rewards.

33

GeorgeNYC 02.26.12 at 9:05 pm

“… I think anyone who reads the passage above is going to end up sympathising with the people in the economics department who say that you really can’t organise a modern industrial society on the basis of organising a wife-swapping party every time you want to buy a blanket”

But that was his point in a way. But the idea is to tackle the assumption in economics that “debt” and money arise out of some “bartering” arrangement rather than out of power arrangements.

Many of the commenters would clearly benefit from reading the book rather than merely arguing along based on their own ingrained assumptions about the subject. In many ways what makes his book so interesting is that it tackles many of these ideas from a different perspective.

34

Ebenezer Scrooge 02.26.12 at 11:25 pm

At least in most modern Western societies, business bankruptcy has been more widely recognized than personal bankruptcy. Throughout most of the 20th century, the US, with its easy personal bankruptcy, has been considered a bit of an outlier. IIRC, it is only in the past decade or two that personal bankruptcy existed at all in some Code Napoleon regimes. I’m a bit more reluctant than Daniel to reason from rules to social conditions, and a bit more ignorant of social conditions than Neville, but a few things to note:
- Bankruptcy is not needed if creditors are few or have considerable solidarity. Non-bankruptcy creditors’ rights work quite well.
- Bankruptcy is not needed if there are no assets or income to fight over. Once you get rid of debt slavery, the vast majority of individuals have never had any assets worth fighting over. (And fighting over income is akin to debt slavery.)
- Bankruptcy does not good for those individuals with assets worth fighting over, if they manage to dissipate them well before the creditors move in.
- Land is hard to dissipate, and my well be worth fighting for, unless it is entailed.
- At least in modern Europe, bankruptcy has always been moralistic. The morality play has the “unfortunate merchant” versus the “wastrel.” Guess who gets more sympathy?

35

Peter T 02.26.12 at 11:55 pm

robotslave, Daniel

Long distance trade – eg lapis lazuli from Afghanistan turns up as jewellery in Sumeria before writing or the formation of cities. Laws – the first written laws turn up in Sumeria c 2400 BC, 500 years before Hammurabi (and there is every indication that written laws are older than this).

Slavery was common in Sumeria, but seems mostly to have been household slavery, and mostly of locals. Significantly, the child of a slave and a free person was free. So no mass slavery – nothing like the later Roman latifundia.

War is older than history, but militarism – centring state power on war – develops in Sumeria only after some centuries of state development. Even Hammurabi was careful to depict himself as a restorer of peace and a pious servant of the gods. Early states centred on temples, not palaces. The same is true of Egypt, and probably of the Indus valley.

Sources – George Roux (Ancient Iraq), Noah Kramer (The Sumerians), Marc van de Mieroop (Hammurabi) are all good reads.

36

robotslave 02.27.12 at 12:44 am

@35

Ah, OK. “mass slavery” I’ll buy, so long as we don’t slip in our arguments and mistake it for “slavery.”

Long-distance trade existed in the neolithic, and there’s paleoarchaeological evidence for it much older than the first settlements in Sumer.

Tribute you didn’t mention, but there’s pots of archaeological evidence that it, too, existed quite a long while before any civilization that left written records.

Your definition of militarism appears to disqualify any prehistoric culture as not constituting a “state,” but there are rather old sites that strongly suggest cultures centered on warmaking (though you might justifiably call it “raiding,” given the scale). Famously, there were extensive fortifications at the present-day site of Jericho some two to four thousand years before the rise of Sumeria.

Your broader argument might be meant to apply only to states with written records, though, so this may not matter.

37

David Graeber 02.27.12 at 2:56 am

I have tried to avoid getting involved with these debates since I have insane deadlines (book due in a week – they really ought to have coordinated the timing with me!) – but, has anyone remarked that the author seems to have gotten things strangely backwards? “Too big to fail” refers to big commercial institutions whose debts _are_ effectively forgiven, even when all the little people are not. The commercial debt/consumer debt division in Mesopotamia was precisely the other way around: big institutions’ debts were not forgiven, and the little people’s debts were forgiven.

Back then, it was more like “too small to fail” and “too big to need to be cut a break”

38

robotslave 02.27.12 at 3:34 am

@37 – …has anyone remarked that the author seems to have gotten things strangely backwards?

Yes, among them the author, if I’ve read comment #3 correctly, and if you’re referring mainly to the title of the piece.

39

chrismealy 02.27.12 at 3:40 am

I was trolling you guys with C++ talk. Somebody was supposed to say, “What’s the linker in this metaphor?”

40

dilbert dogbert 02.27.12 at 4:21 am

Read on a blog somewhere that the “Freedom” mentioned should be translated: “Return to Mother”. I think the bloggers were making fun of libertarians who had the cuneiform tattooed on their arms and of course thought it a very cool thing to do.
What do I know? Nothing.

41

Peter T 02.27.12 at 4:41 am

The Sumerian word is “amargi”, which literally means “return to mother”. It turns up in a document enumerating the abuses of the elite of Lagash, c 2350 BC, and praising the reforms of Urukagina, who “made a covenant with the god Ningursu that a man of power must not commit an injustice against [the weak]“. Kramer The Sumerians p 79

42

david 02.27.12 at 7:30 am

@37: “Back then”? TBTF-ing centralized banks was a triumph of New Deal progressivism; if you want to see “too big to be cut a break” in action, you only need to wind back eight decades, not five millenia.

43

Eli Rabett 02.27.12 at 9:34 am

Money is notational. One of the things it notes is debt. There are instances where people organize barter swap chains, but these are difficult to do, time consuming and fragile, witness the recent 30 kidney implant chain where donors from one party were matched to another as their designated donee got a kidney from another member of the chain. Such swaps often involve parties in different countries where there are monetary disjunctions.

In short, Graeber is about as right as Marx and Hayek. He has one of the elephant’s limbs.

44

ajay 02.27.12 at 11:22 am

“Too big to fail” refers to big commercial institutions whose debts are effectively forgiven, even when all the little people are not. The commercial debt/consumer debt division in Mesopotamia was precisely the other way around: big institutions’ debts were not forgiven, and the little people’s debts were forgiven.
Back then, it was more like “too small to fail” and “too big to need to be cut a break”

1) I think the point is that if you announce that you are going to annul every commercial debt arrangement in the country, the collective response you will get from your country’s merchant class will not be “wow, thanks”.

2) Major commercial institutions haven’t effectively had their debts forgiven en masse. In fact the reason they’re in trouble is partly that (see the post again!) lots of people who owe them money are not going to repay it, for various reasons; the bailout consisted not of the government saying “the big banks don’t have to pay their debts” but of the government, in various ways, putting lots of money into the major banks. A debt jubilee for major banks would be exactly equivalent to depriving everyone in the country of their savings, as I seem to remember noting elsewhere.

45

dsquared 02.27.12 at 12:04 pm

A debt jubilee for major banks would be exactly equivalent to depriving everyone in the country of their savings

In fairness, something like this has been proposed on a number of occasions as a solution to the Irish crisis, although not always by people who were obviously aware that they were proposing it.

46

JohnTh 02.27.12 at 1:04 pm

This impact of a Jubilee is the culmination of what I find both interesting and frustrating about Graeber’s book. At a personal level, for example, I spent a decade trying to save (e.g. consumed well below my income) because I don’t like getting into debt and want to buy a home one day. I now have about a year’s pay in savings. After reading Graeber’s book I have still have a real conviction that wiping out my savings would be unjust, while at the same time appreciating more that the system that underlies those savings is unjust and oppressive. Equally, while I know that often people are crushed by unfair debts practically forced on them (student loans, medical expenses, to some extent mortgages) I also know quite a few people where their going into debt was a free choice to increase personal consumption, and simply cancelling those debts does not seem fair. As far as I can make out, Graeber seems to hold that, since on average debts are unfair, the simplest principle would simply be to cancel all of them,

I also tend to agree with the point dsquared makes that once you have a very large and complex society with millions of people, any organising principles are going to have to be to some extent impersonal, and by extension, dehumanising. The only choice is in what way they do that, unfortunately. (It’s thoughts like that that make one wonder whether we all made a big mistake coming down from the trees in the first place!)

47

Chris Bertram 02.27.12 at 1:21 pm

The Icelandic policy of forgiving debt exceeding 110% of house values looks more workable than an outright jubilee. How generalizable is it?

48

dsquared 02.27.12 at 2:03 pm

How generalizable is it?

Pretty generalisable, but the US jinglemail/non-recourse laws are basically equivalent to the same policy but with a cap of 100%, so you can see that it’s not by any means a panacea.

The point JohnTh makes has also been made in the context of debt jubilees for the third world – it’s not obvious that “in proportion to past borrowing” is a sensible criterion for handing out development aid.

49

ajay 02.27.12 at 2:58 pm

OK, obviously for humanitarian reasons we want a system that forgives completely unrepayable or crippling debts. For reasons of justice as in 46, and for prudent reasons connected with the desire not to crash the entire economy, equally, we probably don’t want a system that just forgives everyone’s debt completely.

But once we get down into deciding which personal debts are large and crippling enough for us to forgive, aren’t we just reinventing the concept of personal bankruptcy/sequestration? Forget “110% capping” or “100% capping” – bankruptcy law is, in a way, “unaffordability capping”.

Incidentally, Graeber doesn’t seem to recognise that, yes, OK, ancient Mesopotamia had periodic debt jubilees but not personal bankruptcy law. If you had debts that you couldn’t afford to pay then, under the code of Hammurabi, you couldn’t just file for bankruptcy and have them washed out. You and your family literally became your creditor’s slaves for up to three years (seven years, under the law of Moses) if you were lucky enough to be a man, and for life if you were a woman.

Yes, “the little people’s debts were forgiven” – sometimes. But if there wasn’t a handy coronation or festival when your debt came due, then you were off to the fields to labour.

50

Matt 02.27.12 at 3:08 pm

once you have a very large and complex society with millions of people, any organising principles are going to have to be to some extent impersonal, and by extension, dehumanising.

The first part of this is obviously right, but I have to admit that I don’t get the second part, or the enthusiasm that some here seem to have for “personalized” interactions. In the large majority of cases I don’t want a personal relationship with the people I interact with, but a “business” one. This doesn’t “dehumanize” them, or me, when I’m on the other side. And, it doesn’t reduce our freedom, but greatly enhances it, it seems to me. (When I lived in a place where you needed personal relationships to get anything done, this was really driven home to me, but even beyond that, I find this desire to have all our interactions be like a camping trip with friends or whatever to be massively odd and a bit silly.)

51

bdbd 02.27.12 at 3:11 pm

I think it was Oscar Wilde who observed that “dzamalag would be fine, except for all the meetings.”

52

gordon 02.27.12 at 11:27 pm

Dilbert Dogbert (at 40): you are probably thinking of this site:

http://exiledonline.com/more-great-moments-in-libertarian-history-ancient-sumerian-word-for-libertarian-was-deadbeat-freeloader/

From the post: “…the only real attempt I can think of to organise industrial production on any other basis from the debt relation is Soviet Communism…”

Or maybe the Sumerians themselves. Gwendolyn Leick’s book “Mesopotamia: The Birth of the City” talks about the likelihood that a lot of economic production was organised by temple and/or palace bureaucracies. Then there is the Late Bronze Age palace culture of Crete and other places, where Linear B texts seem to record more instances of central, bureaucratic economic organisation. Why do we need to pretend that capitalism is somehow “primary”? It has always seemed to me to be a late development.

53

Gene Callahan 02.28.12 at 5:58 am

Robotslave, your equating “history” with “written records” was debunked by Collingwood 90 years ago. What we can glean from archeological evidence from 30,000 BC is no less “history” than are accounts of WWII.

54

RedCharlie 02.28.12 at 3:53 pm

“these assets (ie, mortgage loans) are “bad” precisely because there is a governing law which doesn’t enforce the debt contract as a matter of religion or morality, but rather gives US mortgage borrowers the right to hand back the collateral and walk away from the debt.”

Uh, no. These loans are bad because the debtors can’t pay. They don’t have the money, and the collateral won’t cover it (i.e. the homes are underwater). This is a matter of economic reality, not some legal technicality, or the result of being on the good side of some guv’mint regulator. (BTW, “regulation” is just a word for a law that you don’t like). Most Americans who have defaulted on their mortgages have no other choice.

Yes, the debtors have other assets besides their home, although for most Americans their home is by far their most significant asset. In a crash, however, the more assets debtors sell, the cheaper they become. The more one has to sell to meet the margin call, the cheaper the collateral becomes, leading to more margin calls, leading to a downward deflationary spiral that never satisfies the original debt. Tougher laws might help recover the principal in individual cases but in a system-wide event it just causes things to go downhill faster. Everyone can’t de-leverage at once.

As Graeber asks, if you walked into a bank and aksed for a few million quid to bet on a horse, why wouldn’t they give it to you? Because there is no way they would ever get their money back, right? But what if there were a law that let the bank sell you into slavery, or harvest your organs, what then? Aside from the obvious inhumanity of such a law, even something so extreme won’t work in an economic crisis. If everyone is selling something, and no one is buying, then simple supply and demand demonstrates that the price collapses, whether the something is houses or stocks or slaves.

Far from your picture of a modern-day jubilee, the modern housing market is characterized by homeowners stuck in underwater loans and/or unable to change jobs due to the difficulty of selling their home, banks stuck with CMO’s that they “mark to model” to avoid taking a loss, “shadow inventory” of foreclosed homes that banks dribble slowly into the market to avoid collapsing the price further, etc. This isn’t a picture of debts written off but of enormous efforts to support the fiction that these debts can eventually be repaid.

And this fiction can sometimes be supported for a long time, decades even. Just look at Japan. But it’s still a fiction.

For another example, just look at Greece. There is no way that Greece can repay it’s debt to the rest of the EU. It’s just impossible. So far, the “bailout” has just been a charade to pretend it isn’t so, stringing Greece along with more loans while the debt to GDP ration just keeps ratcheting upwards. It’s not just that the IMF or European assistance to Greece is “designed to fail”, rather it’s that any plan will fail if it requires Greek debt to be paid. Go ahead, crush the Greeks with austerity, sell the Parthenon and the Acropolis (Italy is selling lighthouses, I hear) but it won’t help in the end, no more than Andrew Mellon and his liquidationism helped in 1930.

Your bit about dzamalag is really cute and will allow all the very serious people to dismiss Graeber as another hopelessly impractical lefty dreamer, but it just makes no sense. Graeber shows that first came debt, then money, and then barter, not the other way around as most economics assumes. He’s not arguing for some commie alternative to debt, like production quotas, but rather that debt relations are fundamental to any society , not just modern industrial ones. Debt is not some new problem that we can escape by going to the good ol’ wife-swapping days.

So, making Graeber look like he’s arguing for a return to hunter-gathering works about as well as a straw man would at a real dzamalag.

55

dsquared 02.28.12 at 4:18 pm

These loans are bad because the debtors can’t pay. They don’t have the money

Lots of them probably can pay, and if not they have family members who could be persuaded to pay for them, and they might have the money if they gave up on any ambition to a decent life for themselves and their children. Don Corleone would probably be able to get the money out of them, and so would a Sumerian monarch if he wasn’t feeling generous that year.

But, the bankruptcy code of the USA has been designed to be more debtor-friendly than this; it doesn’t (in the case of mortgage debt in most states anyway) require debtors to make sacrifices to maintain service on a housing loan which is underwater like this. Most Americans who have defaulted on their mortgages did have other choices, but the law was set up so as not to require them to make these choices. And this is a good thing, and it shows that the institution of debt has been intentionally designed by people who had a view of how best to organise the housing finance market.

So as a matter of law, not very many Americans, proportionately, are “stuck in underwater loans”. They are either in a situation in which they believe that it remains their best alternative to keep paying (usually they are worried about their “credit rating” – the creditor’s power to not lend any more, which underlines how useful it is to be able to get yourself into debt relationships), or they have mistaken an arm’s length commercial transaction designed by economists, for a “human economy” in which they have a social relationship of obligation to Countrywide. For those people trapped in that mistake, it certainly doesn’t help that there are so many banking industry PR men and wannabes encouraging them into it. But it’s not a problem of the debt relationship as it exists in the USA right now.

Or to precis; the problem with debt isn’t that it commodifies relationships of power and reciprocity – it is that it doesn’t commodify them enough.

56

RedCharlie 02.28.12 at 5:18 pm

he understimates the extent to which there have always been domesticating influences on the concept, and the extent to which the debt relation has always been, correctly, the subject of revision and reappraisal, with the basic underlying question being that of economics rather than anthropology

Stuff like this make me think you are (trying to drive me) looney. You think he underestimates the extent to which debt has been the subject of revision and reappraisal? Isn’t that what he wrote the book about? You know, five thousand years of debt? About how every society has to deal with the problem of debt, and how, you know, different societies have different ways of dealing with the issue, from Jubilees to the Muslim prohibition on interest to Roman law and its definition of interest. About how Catholicism evolved from prohibiting interest to accepting it. Sheesh, what more do you want? A sequel? Ten thousand years of debt? An exposition on economics on alien worlds or on trade across interstellar space? I mean, seriously, you take almost the exact words I use to describe the book, and you say he hasn’t done enough. WTF? Okay, at the very end you wish the book were twice as long and ten times as ambitious, so maybe that’s what you meant. But it’s an odd sort of criticism to say an author should have written more about his central thesis. Usually it’s a compliment when someone says, “I want more!”

And the bit about “the basic underlying question being that of economics, not anthropology” really confuses me as well. When I see my mortgage statement, the basic underlying questions in my mind, like “how soon will we pay this off?” and “if I or my spouse lose our jobs how will we still pay this?” etc. are rather economic in nature. What do you think about? Astronomy? Poetry? Anthropology? Somehow I doubt it. I don’t think Graeber is suggesting otherwise either. When he describes the English shopkeeper who had his customer hanged for her debt, I got the distinct impression that the shopkeeper was rather preoccupied with economic issues.

But maybe that’s not quite what you meant. Maybe you meant that Graeber suggests we mix a bit more anthropology into our economics to understand debt, but you disagree. So, you mean to say that history (or anthropology?) will show that economics is economics? That is, you’ve wasted everyone’s time to give a tautology? Right. That doesn’t make sense either.

Okay, my third try to figure out what you mean by “economics vs anthropology” is that you’re saying history is bunk, or at least not as useful as Graeber thinks, when it comes to economics. It’s all just dollars and cents or pounds and pence. I’ll settle for this as it is at least intelligent enough to “have an argument with”. Graeber argues not only that debt is a universal part of human experience, but that the ways we have evolved to deal with debt are a lot more varied and nuanced than most people realize, and that we would be well advised to study the history of debt to better understand the quandary we are in now.

I think the saying, “Those who do not understand the past are doomed to repeat it.” applies just as much to economics as any other aspect of human endeavor. Maybe you don’t agree. Fair enough.

But I really don’t think you mean any of the above. Rather, your text just seems like a BS nitpicky concern troll segue into your final paragraph, where you suddenly reveal that you agree with Graeber after all. As I now here suddenly reveal that after all the above ridicule I’ve heaped on you, I agree wholeheartedly with your final paragraph. It’s just a mystery to me, however, how that final paragraph derives from all the proceeding ones.

57

dsquared 02.28.12 at 5:37 pm

Isn’t that what he wrote the book about? You know, five thousand years of debt?

Yes, and my argument is that he doesn’t recognise that it’s a Bildungsroman – the title character isn’t the same at the end as it was at the beginning.

Specifically, and this is why I don’t think that the anthropological or historical perspective is as useful as Graeber does (although still very interesting), the institution or collection of institutions that we call “debt” isn’t a single entity that has a past or an immutable nature – it isn’t tainted with the original sin of whatever awful things were done to debtors in seventeen whenever.

My contention here is that “debt” is a solution to a problem – the problem in question being the organisation of large and complicated systems, and the need of economic actors in complicated societies to economise on the amount of knowledge and information they need to assemble, and the number and depth of the social relations they have time in the working day to maintain. That’s why bankruptcy codes get planned, written and revised. That’s why institutions like jinglemail, too-big-to-fail, deposit insurance, limited liability, etc etc, get developed. It isn’t a process of natural evolution, it’s a process of intelligent design. Sometimes, as in the Hansard records of the debates over the Companies Acts, you can watch the design process.

Which was, in my mind, the purpose of the “dzamalag” joke – the smaller point here was that you can’t run a modern economy on the basis of maintaining a swingers-club relationship with your baker. But the larger point was that you can’t run a modern economy on the basis of unlimited corporate liability and debt peonage either. The reason that jinglemail caught on is the same reason why dzamalag didn’t – it’s just a much more convenient and sensible solution to a constrained optimisation problem.

One day I’m going to write “Why I Am Still An Economist”, even after everything and the basic reason will be that I still believe in the one defining axiom of economics – the statement that literally every economist of any kind has to believe. Bygones are bygones.

58

ajay 02.28.12 at 5:53 pm

There is no way that Greece can repay it’s debt to the rest of the EU. It’s just impossible. So far, the “bailout” has just been a charade to pretend it isn’t so, stringing Greece along with more loans while the debt to GDP ration just keeps ratcheting upwards. It’s not just that the IMF or European assistance to Greece is “designed to fail”, rather it’s that any plan will fail if it requires Greek debt to be paid.

It seems like pretty much every CT thread someone says something like this. One more time:

It is simply not the case any more that anyone is expecting Greece to pay of all its debt.

Existing Greek sovereign debt is going to be the subject of a massive haircut – essentially the lenders are writing off half the money that Greece owes them and accepting the rest in the form of new debt with a longer term and different coupons.

This sort of debt restructuring is common practice (maybe not at this scale) in banking. It’s a solved problem. The heartache is about “what does Greece do now in terms of taxation and spending”.

And, as dsquared says, there’s a real tendency here to ignore the existence of bankruptcy when you’re talking about people being “trapped by debt”.

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RedCharlie 02.28.12 at 6:01 pm

So as a matter of law, not very many Americans, proportionately, are “stuck in underwater loans”

– Nearly 29% of mortgaged homes underwater
http://www.ritholtz.com/blog/2011/11/underwater-mortgages/
http://bottomline.msnbc.msn.com/_news/2011/11/08/8687925-nearly-29-of-mortgaged-homes-underwater-report-finds

So, two questions.

One, what does law have to do with your home being underwater? That’s the market telling you that, not the guv’mint.

Two, why is 29% not a large proportion of Americans?

Most Americans who have defaulted on their mortgages did have other choices, but the law was set up so as not to require them to make these choices

Just google “strategic default” and see what percentages you get. Here’s one Morgan Stanley PDF quoting an academic paper stating that strategic defaults rise to %17 when households are %50 underwater.
http://www.transunion.com/docs/rev/business/financialservices/FS_MorganStanleyStrategicDefaultResearch.pdf

A Washington Post article giving strategic defaults as 26% and 35% of all mortgage defaults for May 2009 and Sept 2011
“But even though 11 million homeowners in this country are underwater, only 7 percent of them have defaulted”
http://www.washingtonpost.com/business/economy/strategic-defaulters-pay-bills-on-time-and-plan-ahead-study-finds/2011/04/21/AFcGQSLE_story.html

So most Americans do and are sticking it out. Some defaults are strategic (and the wealthier you are, the more likely the default is strategic, but that’s true by definition!) but most defaults are not “strategic” (not even a “large proportion” by your math! Well, okay, maybe 29% is not but 35% is, I don’t know where you draw the line)

You think most foreclosed Americans choose to lose their homes? That they could have given up their kid’s college money (ha! yeah, right, everyone is sitting on a big nest egg of that these days. BTW, have you noticed what’s happening with student debt these days) or asked extended family for help. Like they wouldn’t try that before being kicked out to the street. You sound like Ron Paul meekly whining that if we got rid of Medicare no one would die, you know, churches, families, friends, big-hearted softies, etc. would somehow pay. Sorry, doesn’t happen.
http://nymag.com/daily/intel/2011/09/ron_pauls_campaign_manager_die.html

But really, the larger point is that in a debt crisis it is mathematically impossible to for everybody to de-leverage at once. Not everybody can get their money out of the bank at the same time. You can’t sell assets to pay your debts if no one is buying the assets.

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RedCharlie 02.28.12 at 6:30 pm

Specifically, and this is why I don’t think that the anthropological or historical perspective is as useful as Graeber does (although still very interesting), the institution or collection of institutions that we call “debt” isn’t a single entity that has a past or an immutable nature – it isn’t tainted with the original sin of whatever awful things were done to debtors in seventeen whenever.

You are driving me bananas. You don’t find the anthropological perspective useful because “debt” is not a single entity with an immutable nature. So, Graeber’s book is not useful because he’s right??? OMG!!! My head is spinning. Graeber writes hundreds of pages to demonstrate your very point, that debt is much more complicated than we realize, that it’s a tool that every society has evolved to solve a common problem, and that it’s not this simple clearcut moral issue that we think it is, and that’s why you don’t find him “useful”???!?!?!

Oh Lordy, I can’t take any more of this! I’m afraid that if I read any more my head will explode. I concede!!! Please, stop! I give up!!!!

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dsquared 02.28.12 at 6:50 pm

just on a practical note, multiple exclamation marks get converted into graphics which don’t display very well, so it is best not to use them.

My point (which I am now exaggerating, overstating and oversimplifying in order to make it as clear as possible that I don’t agree with Graeber and that I think he’s at base wrong, not right) is specifically that debt is simpler than Graeber claims. It isn’t (or at least, the vast majority of actually existing debts in a modern society) a complicated historical social anthropological entity with all this baggage. It’s a set of rules for the organisation of production, consumption and exchange, which just represents a specific application of the general ability of human beings to make plans and carry them out. As I say, I don’t agree that it’s evolved, I think it’s been designed.

And therefore I don’t think that studying Sumeria or Madagascar or basically anything other than a decent commercial law textbook is going to contribute to our understanding of debt in our own economy. Presumably David Graeber disagrees. He doesn’t think that his book is just a picaresque set of tales about the history of an everyday thing we all take for granted, like “Cod” or whatever – he thinks that the historical and anthropological material is going to help him establish specific conclusions about political economy today. I don’t agree.

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dsquared 02.28.12 at 6:53 pm

And I think #60 is just wrong about the book. The thesis of Debt is that there are lots of common characteristics which the debt relationship always bears – it’s always related to state power, it’s always imposed on societies from above, it always has the effect of turning human relations into commodities etc.

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RedCharlie 02.28.12 at 8:09 pm

just on a practical note, multiple exclamation marks get converted into graphics which don’t display very well, so it is best not to use them

I’ll make you a deal. Don’t make my head explode and I won’t bang on the keyboard like a lolcat on meth.

And therefore I don’t think that studying Sumeria or Madagascar or basically anything other than a decent commercial law textbook is going to contribute to our understanding of debt in our own economy.

So you do believe that history is bunk. Fair enough. But you do tend to mention law quite a bit for an economist, and although IANAL, I can say that a lawyer would remind you that law does depend quite heavily on precedent, which is a fancy way of saying history.

And I think #60 is just wrong about the book. The thesis of Debt is that there are lots of common characteristics which the debt relationship always bears – it’s always related to state power, it’s always imposed on societies from above, it always has the effect of turning human relations into commodities etc.

Really? Did you read the book, like the part about how the Islamic ban on interest is something that came about because the state was uninvolved? i.e. that commercial debt relationships in medieval Islam were very much a private, bottom-up affair that the government would not enforce?

But I know you read the part about the dzamalag, because you quoted it. Maybe somebody told you about this hippy book by some anthro long-hair suggesting the solution to all our troubles is to start swapping wives. Gosh, what fun that would be to take apart huh?! Trouble is, if Graeber’s thesis is that debt is always imposed from above, always involves the state, and always commodifies, where are those three elements in the dzamalag story itself?

You can’t answer that because those elements are not there. Just as there is no evidence that barter ever arose before money. Graeber’s thesis is the opposite of what you write. He shows that debt is a bottom up phenomenon, a universal human experience. It gets abused by states, and it can turn people into commodities (literally as slaves). But not always. It doesn’t have to be that way. And no one but yourself is suggesting that wife-swapping is the alternative to modern commerce.

to make it as clear as possible that I don’t agree with Graeber and that I think he’s at base wrong, not right

To make it clear that you think Graeber is wrong I suggest you stop criticizing him for things he didn’t write and then agreeing with things he did write.

I don’t agree that it’s evolved, I think it’s been designed

Oh Lordy, stop picking fights. Do you really not have anything else to write about? I don’t give a phooey if you think the earth is 6000 years or 7 days old. Evolved, designed, immaculate conception, whatever dude. I don’t care. I don’t think Graeber does either. Just say, “Debt is a tool that people use in their economic relationships with each other.” See how easy that is? We all can agree on that. Doesn’t matter if that tool is a product of intelligent (or not so intelligent) design or not.

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dsquared 02.28.12 at 8:53 pm

Do you really not have anything else to write about?

In general, and I think I am being pretty polite here considering, this sort of ejaculation would be better placed if it was me constantly trying to buttonhole you on your blog, rather than vice versa. Turn it in, please.

Trouble is, if Graeber’s thesis is that debt is always imposed from above, always involves the state, and always commodifies, where are those three elements in the dzamalag story itself?

Very weak. The passage I quoted comes from the discussion of human economies and shouldn’t be expected to have the characteristics of the modern debt-relation, as it is meant to demonstrate an alternative structure of social relations. As you know, because you have read the book, as you keep telling me. Really, this is going to be a very unproductive source of “gotcha” moments for you, because the whole point of the historical and comparative passages are to show the common elements with today’s banking sector. That’s the point of the book.

He shows that debt is a bottom up phenomenon, a universal human experience.

This is a whole different angle of unconvincingness, based on trying to pretend not to understand the difference between such things as a child’s “debt” to its parents and normal kinds of debt. I’m actually trying to reconstruct the strongest version of his argument and avoiding the bits that appear to be based on taking figurative language literally. But you might understand that I am not terribly keen on having that discussion with you right now.

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RedCharlie 02.29.12 at 2:00 am

In general, and I think I am being pretty polite here considering, this sort of ejaculation would be better placed if it was me constantly trying to buttonhole you on your blog

Eh?? I don’t understand this at all. You think it would be more polite if you were dishing it out to me, rather than vice versa? Oh, I get it, it’s okay for you to be frustrated with me but not vice versa, cause you’re the blogger, right. Maybe the word you’re looking for is “convenient”, not “polite”, but whatever. Granted I took some liberties with the “hippie bashing” but you can take a joke right? You can certainly tell one, I mean, that joke about running a modern economy by swapping wives, that’s a real knee-slapper, that one.

Honestly, I’m just trying to figure you out, not put you in a box, much less a buttonhole. You keep saying you don’t agree with Graeber, but then you do, but then I probably just don’t understand what you’re writing.

“Design” vs “evolution” in this context is a semantic difference to me but obviously very important to you, I confess I do not understand why. I didn’t mean to offend you with my exasperation. Can we agree that laws are certainly deliberately written or designed by people, but that they also can be amended or changed over time, albeit deliberately changed by the legislative powers that be? And that the actors so doing draw upon our collective experience of the past as is codified in that subset of history called the Law?

The passage I quoted comes from the discussion of human economies and shouldn’t be expected to have the characteristics of the modern debt-relation, as it is meant to demonstrate an alternative structure of social relations

No one suggested that wife swapping had anything to do with modern anything, except you. (Gosh, that was funny!) And yeah, the dzamalag is an alternative model of social relations, especially those social relations concerning debt! I assume that’s why Graeber included it, but I could be wrong. Maybe he just needed another picaresque tale for his collection.

this is going to be a very unproductive source of “gotcha” moments for you, because the whole point of the historical and comparative passages are to show the common elements with today’s banking sector

I agree this has been rather unproductive for me. Painful too. I don’t know why I feel so compelled, but here I am. Still. I thought I was arguing that Graeber shows the common elements between primitive and historical debt and modern debt, but no! that’s the point you are trying to make. Huh? (soft whizzing sound as my head spins)

This is a whole different angle of unconvincingness, based on trying to pretend not to understand the difference between such things as a child’s “debt” to its parents and normal kinds of debt

Look, there are lots of things I don’t understand, no need to pretend here. I do know, however, that I can’t call up the bank and tell them to forget about the mortgage until my kids pay it. But, then again, you just wrote that Graeber’s point is to show similarities between different kinds of debt! Like the similarities between ancient and primitive forms of debt and modern ones, and the similarities between children’s debt to their parents and those thingies that made John Paulson so much money? I do agree with you that that is at least a major point of the book, maybe not “the” point but a main one.

This is to say I still don’t understand what it is that I don’t understand. Is it that I don’t realize that Graeber is showing similarities between different kinds of debt relations, or is it that I don’t understand (or am pretending to not understand) the differences between them?

But I’ll forget that for now. In at attempt at closure, I think (but am not sure) that I can safely say that I disagree with you on two things, and agree with you on one.

First, and less importantly, I think you think that modern debt relations are fundamentally different from pre-modern ones. I disagree with you, somewhat.

The following is your caricature of his thesis:

The thesis of Debt is that there are lots of common characteristics which the debt relationship always bears – it’s always related to state power, it’s always imposed on societies from above, it always has the effect of turning human relations into commodities etc.

But you also write the following:

My point … is specifically that debt is simpler than Graeber claims. It isn’t … a complicated historical social anthropological entity with all this baggage.

The two statements conflict. The first states that Graeber thinks debt is simple. Evil and dehumanizing as well, but simple in that all debt is top down, state involved, and turns people into commodities. The second states that Graeber thinks debt is complex, with lots of anthropological “baggage.” The two statements do not conflict, however, if I assume the first one is really only about Graeber’s idea of modern debt, and the second is really about modern “commercial law” debt not being the same as the more encompassing, anthropological pre-modern idea of debt as a species of social relation.

Assuming that you agree with this statement of your position, I disagree with you, somewhat. While obviously modern and pre-modern debt do obviously differ, I don’t think Graeber means to show that the first is always evil and the latter always good, but rather all forms of debt are attempts to solve the fundamental problem of how to conduct economic relations with people beyond your immediate neighbors. And as such, all forms of debt-relations suffer from similar troubles. And as such, past forms of debt relations do have something to contribute to our understanding of modern ones. Our current pickle is not entirely a new phenomenon.

Which leads me to the second and more important point of disagreement. I think that you think history is bunk, at least as far as economics is concerned. All we need to understand modern debt is a “decent commercial law text”, I assume one with few picaresque tales. I just flat out think you are wrong on this, especially concerning Macro-economics. With Micro-economics, I grant you it is possible to run experiments in real time, although I still think a good foundation in Anthropology and Psychology is necessary to separate what is Economics from what is not (i.e. culture). Moreover I would think that any understanding of Law, even of commercial law, requires some understanding of history. After all, Law is really a very precise subset of History.

But with Macro-economics one has to look to History for “natural experiments”. Trying to understand Macro-economics without understanding History is like trying to understand Geology without understanding the History of the Earth. I don’t think it’s possible. Unfortunately you are not alone in your belief. I think a great deal of our present-day economic woes could have been avoided if the economic profession as a whole had not been so eager to forget the lessons of the past hundred or two hundred years. “This time is different,” and “this time we’ve figured things out,” seem to be all too common sentiments prior to some financial debacle.

Lastly, I agree with you that debt is fundamentally a tool.

It’s a set of rules for the organisation of production, consumption and exchange, which just represents a specific application of the general ability of human beings to make plans and carry them out

and

My contention here is that “debt” is a solution to a problem – the problem in question being the organisation of large and complicated systems…

Exactly. Why you think Graeber would disagree is beyond me. I think his idea of debt is more encompassing than yours, but it would certainly include your two statements above. Instead, I think he is actually trying to get us to focus on exactly this point, and drop the anthropological “baggage” that leads us to think that our current economic quandary is due to the moral failings of millions of homeowners.

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Matt 02.29.12 at 2:43 am

I can say that a lawyer would remind you that law does depend quite heavily on precedent, which is a fancy way of saying history.

It’s not a fancy way of saying “history” in the sense you seem to be suggesting, so far as I can make any sense of it.

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dsquared 02.29.12 at 6:30 am

I thought I was arguing that Graeber shows the common elements between primitive and historical debt and modern debt, but no! that’s the point you are trying to make. Huh? (soft whizzing sound as my head spins)

Just to note that I have checked out of this debate, with the option to rejoin it if you start seeming to make more of a good faith attempt to understand me.

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js. 02.29.12 at 6:56 am

Daniel Davies/dsquared:

There’s this line of argument that Robert Kuttner, Krugman and others have been forwarding for a while now, viz., that the best way to make sense of a whole spate of current policies are that they favor creditors at the expense of debtors. (I won’t spell this out more since I imagine you know the line of argument, but suffice it to say that the creditors in question are not “small” creditors, given this line of argument—we’re talking about rentiers after all.) I have found this line of argument quite convincing, but unless I’m misunderstanding you, you seem to be (implicitly) opposing it. Is this right? Could you say a bit more about this explicitly? (I realize this goes off-topic somewhat.)

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dsquared 02.29.12 at 8:19 am

No I think it’s on topic and it’s pretty hard to argue that the bankruptcy reform of 2006 wasn’t pretty much explicitly aimed at favouring creditors over debtors (by which I mean “bought and paid for by the credit card industry”). But if you look at the debate over bankruptcy reform, it had really very little to do with concepts of moral desert, religious obligations, social contracts and whathaveyou, and a hell of a lot to do with people’s beliefs about the economic consequences of different bankruptcy rules. My point here is that this (and most modern debts in the normal sense of the word) is governed by a technical debate which looks much more like the black-box economics department view than all of the allegedly deeper and richer social-anthropological stuff in Debt

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Peter T 02.29.12 at 9:31 am

D2

The debate may have had a lot to do with economic consequences of different rules, but the frames in which those consequences were thought about, and the frames the rules reflect, and the frames around “economic consequences” are surely social and political, no? They were “bought and paid for” by an industry”, and reflect that industry’s interests more than they reflect the interests of debtors. That’s a matter of power, no? Since people do – probably cannot – separate out their lives into the social, the economic and whatever, but live them all mixed up, formed by a patchwork of echoing past beliefs, ideologies, inherited institutions and so on, makes history relevant. It highlights the roads we did not take, and therefore the hidden contours of the ones we did.

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dsquared 02.29.12 at 9:57 am

It highlights the roads we did not take, and therefore the hidden contours of the ones we did.

but surely to god when you get back to the ancient Sumerians, diminishing returns must have set in?

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ajay 02.29.12 at 10:31 am

Since people do – probably cannot – separate out their lives into the social, the economic and whatever, but live them all mixed up, formed by a patchwork of echoing past beliefs, ideologies, inherited institutions and so on, makes history relevant. It highlights the roads we did not take, and therefore the hidden contours of the ones we did.

Just as long as you don’t go back too far and become an evolutionary psychologist. You can stop highlighting those roads when you get to the Suez Canal, more or less.

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Cranky Observer 02.29.12 at 12:21 pm

=== dsquared 8:19 “But if you look at the debate over bankruptcy reform, it had really very little to do with concepts of moral desert, religious obligations, social contracts and whathaveyou, and a hell of a lot to do with people’s beliefs about the economic consequences of different bankruptcy rules. ===

Every discussion of how to climb out of the housing/mortgage hole that is doing so much damage to the US economy is brought to an absolute halt by the first dropping of “but what if undeserving people get assistance through this program; what about the reckless immoral people who took large mortgages and bought big-screen TVs?”. Ezra Klein describes this as ‘the politics of mortgage reform are toxic’ but what it boils down to is a very deep belief about the morality of assuming and paying household debt by the voters that the senators and representatives believe control their reelection. President Obama and his advisers speak in the same terms, and are apparently terrified of taking any action on mortgage debts under the authority they do have for fear of being labeled as “helping the irresponsible”.

Hard to see how that is anything but a modern morality play directly and significantly affecting the US economy.

Cranky

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dsquared 02.29.12 at 1:43 pm

Probably true, but in as much as people do this, it is wrong and they should knock it off. One can certainly see a way in which Graeber’s message could be co-opted and perverted in a sort of “Born In The USA” fashion by people who wanted to argue that debt had an important social and cultural role and that the simple economic efficiency arguments for restructurings ought to be ignored in favour of a view that took a more holistic, anthropologically meaningful, etc, view of people’s mortgages (if Megan McArdle has already done this one, please don’t tell me).

So I see this as score one to the economists – things would be going a lot better if we had a lot less of this socially embedded stuff hanging around.

I was just thinking about a similar topic – the regulation of payday lenders. Lots of people really hate the payday lending industry for not always very good reasons. But if you and I are in a room, trying to draw up a code for regulating the industry, then what do we need? We need an estimate of the benefits to borrowers of being able to smooth consumption, an estimate of how far we can regulate rates before we push down the industry’s return on capital to a level where they give up, an estimate of the social externalities caused by payday lending, and an estimate of the likely prevalence of loan-sharking in the absence of a regulated payday loan industry. Maybe once a decade we have a Royal Commission about why these communities have such low and irregular incomes that they are always using payday lenders.

The point I’m trying to make here is – since we get the first two from economists, and the last two from sociologists/criminologists, what did we hire the anthropologist on the team to do? Once we’ve got all the information we need to answer the practical questions and solve the constrained optimisation problem, what do we gain from an insight into the meaning and significance of payday loans, other than an interesting read? It seems to me that the stigma and shame attached to payday loans, from a policy point of view, is something that should be noted, respected but basically ignored.

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Metatone 02.29.12 at 5:13 pm

FWIW (and it may not be worth much to Dsquared) the main observation one draws from reading the opinions of Fama, Cowen and others on the whole Great Financial Crisis is that a significant part of mainstream economics thinks in moral frames, not technical ones.

We can see this from the massive elevation of “moral hazard” from a technical problem to be optimised to the major issue at hand.

As for anthropologists – they probably have a bigger role to play in the Royal Commission about why these communities do not in fact have such low and irregular incomes that it precludes banks, building societies and credit unions from operating in similar communities in different parts of the UK, but are missing from this one.

Not that there isn’t still a need for payday loans, but in the UK at least, there’s a hugely uneven spread of banking services – and it’s not for economics reasons. Fixing this would help simplify the payday loan regulation problem as you’d be dealing with a smaller number of cases with a clearer need.

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RedCharlie 02.29.12 at 5:34 pm

@Matt (#66)
I mean to say that law depends on precedent, on laws and legal opinions expressed in the past, like the way our legal definition of interest goes all the way back to Roman law. That is to say, legal history isn’t just academic.

@DD
All snark aside, how am I not arguing in good faith? I spent hours last night trying to distill what you have written into three reasonable expressions of your views that I think you can agree with (and I even agree with one), and you say I’m a troll. I admit that I get exasperated and snarky but you’re a grownup. I’m not calling you names and I’m not here (just) to piss you off. I think your intentions are good.

So, if I’m not here just to irritate you, what am I here for? Hard to say, but I really loved Graeber’s book, and found it wonderfully enlightening. You seem to have found it interesting also, but then you also treat it dismissively, as of no use in our current predicament and mostly of entertainment value. And I think and feel that you are wrong about this. History (and Anthropology) isn’t just one dang fact after another. I’m not post-modern; I believe in the value of debate and discussion. I wouldn’t be here if I thought I was talking to a brick wall.

For me, the biggest benefit is being forced to clarify–and change–my thinking on the issue. It’s been months since I read the book and you’ve inspired me to re-read it. So, I admit that memory of the book is not fresh and is flawed and incomplete…I’m mostly shooting from the hip but it’s an honest effort.

So I see this as score one to the economists – things would be going a lot better if we had a lot less of this socially embedded stuff hanging around.

Yes, I agree with you here, mostly. We have a lot of baggage, hangups, whatever we call it, that interferes with us dealing rationally with economic problems. But I don’t think Graeber argues otherwise.

…what did we hire the anthropologist on the team to do?

Well, for starters, to help you get rid of all the baggage you don’t want, right? I mean, you can’t just get rid of people’s irrationality by ignoring Anthropology any more than you can get rid of your neurosis by firing your shrink. If you just tell people to “knock it off” it won’t work. It’s not a problem that will just go away on it’s own, no matter how many times you ignore the messenger.

Otherwise, you will always be blindsided by the Rick Santelli’s of the world, and rational efficient policies won’t make it past all the guilt, blame, sin, and other irrational and un-economic baggage of our messy world. You fear that Graeber can be used to replace “simple economic efficiency arguments” with a “more holistic, anthropologically meaningful, etc, view of people’s mortgages.” But I don’t think he is suggesting replacing your bank with a drum circle, or replacing mortgages with wife-swaps. (Even rock stars want their accounts to wear ties.)

Acknowledging that people are irrational does not mean that we have to make economic policy less rational, but rather a necessary step to realize economic policies that are more rational, more effective, and more just.

Now that I’ve re-read it, the point of Graeber’s dzamalag story wasn’t just to illustrate similarities between past and present social relations, but also to show that people are not rational economic actors. So any theory, like EMH or the theory of barter, is flawed if it requires people to be rational. In the words of Larry Summers, “There are idiots. Look around.” And I confess my own current obsession with defending Graeber is not a rational economic use of my time either. Please understand that I am not defending idiocy (well, other than my own) or advocating irrationality by acknowledging it.

Insisting on pure rationality is ultimately fatal to economics. The math may be beautiful, but the economy that can be completely reduced to equations is not a human economy. I don’t agree with Graeber that the conversion of obligations to numerical debts is a source of violence (the potential for violence is just part of being human, it’s no less present in the dzamalag than in a modern CDO). But I think he would agree that economic rationality–while very useful–has its limitations, and we ignore those limitations at our peril.

You believe that,

Once we’ve got all the information we need to answer the practical questions and solve the constrained optimisation problem …

…then we don’t need the anthro guy/gal on the team anymore. Once we’ve collected enough data, we can find the right equation, the right model, and that’s really all we need to know. We certainly don’t need to know the history of Sumer or Madagascar to do the math. Right? I think that’s a fair statement of your view.

In all due respect, I think you are wrong. And in light of the fact that lots of folks were telling us as late as 2008 that they had all the right equations and new what they were doing, I think you are being a bit arrogant too. The anthro gal on the team is not there just to help you navigate around the unavoidable messiness of human politics, but also to serve as a reality check. Bubbles and crashes look obvious in hindsight, but seeing them in real-time requires a broader understanding of human nature.

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RedCharlie 02.29.12 at 5:41 pm

Oh, and I just want to say that I don’t think that an anthropology professor literally needs to be in the room when economic policy is being made. But having an economic historian around ( I imagine someone like Kevin Phillips, author of Wealth and Democracy ) would be a good start.

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geo 02.29.12 at 5:49 pm

dsquared @74: Maybe once a decade we have a Royal Commission about why these communities have such low and irregular incomes that they are always using payday lenders

Once a decade?

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geo 02.29.12 at 5:51 pm

Maybe once a decade?

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Jerry Vinokurov 02.29.12 at 5:53 pm

The point I’m trying to make here is – since we get the first two from economists, and the last two from sociologists/criminologists, what did we hire the anthropologist on the team to do? Once we’ve got all the information we need to answer the practical questions and solve the constrained optimisation problem, what do we gain from an insight into the meaning and significance of payday loans, other than an interesting read?

Doesn’t that depend on whether you think some of those constraints on optimization come from sources amenable to anthropological study?

It seems to me that the stigma and shame attached to payday loans, from a policy point of view, is something that should be noted, respected but basically ignored.

Well, maybe, but the ways in which people are thinking about debt are going to reflect what kinds of policies they are or are not willing to support. If Graeber’s work does nothing else, it could be instructive in explicating how that shame and stigma came about, and possibly how to avoid it. We’re not just solving some abstract constrained optimization problem, even though that would be nice, we’re embedded in some kind of political reality that imposes its own constraints on what kinds of optimizations can be done.

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dsquared 02.29.12 at 6:04 pm

RedCharlie: I apologise for the imputation of bad faith, but I really don’t feel we’re making progress here understanding each other.

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dsquared 02.29.12 at 6:06 pm

Maybe once a decade?

Well, how often would you propose holding an expensive inquiry into a question that everyone knows what the answer is?

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RedCharlie 02.29.12 at 6:36 pm

Okay, I can take a hint. You’re done with me, fair enough. I’ll shutup now. You’ve had more patience with me than most folks.

But if you do still want to continue, just point out where I fail to understand you, since you think my characterization of your position is wrong.

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geo 02.29.12 at 7:15 pm

Well, how often would you propose holding an expensive inquiry into a question that everyone knows what the answer is?

I’d propose a revolutionary tribunal in continuous session, chopping off ruling-class heads until low and irregular incomes are a distant memory.

Seriously, I thought your phrasing unfortunate. It disclosed no hint of your (undoubted) burning indignation that millions of people are sufficiently desperate to need those wretched consumption smoothing devices. It might even have led those who don’t know and cherish you to doubt the existence of that burning indignation, the absence of which, when contemplating the chronic misery (including, but not limited to, stigma and shame) the practice of payday loans presupposes and perpetuates, would seem an indication of insufficient fellow-feeling, or even smug twithood.

But probably you just dashed off the comment in a hurry, or had used up this week’s quota of burning indignation.

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dsquared 02.29.12 at 10:41 pm

when contemplating the chronic misery (including, but not limited to, stigma and shame) the practice of payday loans presupposes and perpetuates

I think that’s laying it on a bit thick. Sometimes they really are just a loan of two score until payday. There are good and bad small-ticket consumption finance arrangements, that was the point I was making. The rich don’t always time their consumption to match up to their income, so why should the poor? More or less at any level of income or wealth, people are going to want credit. This is one area where regulation can make a massive, massive amount of difference to the outcomes, and where thinking about it in terms of “debt” being inescapably linked with shame, stigma and misery seems to me to be really quite counterproductive to the design of a sensible regulatory regime.

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Phil 02.29.12 at 11:12 pm

I vote to keep the anthropologist; I think the question of whether there actually is any stigma and shame knocking around, and if so where it comes from and how it can be designed out, is relevant & non-trivial.

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Peter T 02.29.12 at 11:15 pm

“but surely to god when you get back to the ancient Sumerians, diminishing returns must have set in?”

Not if you use a 12 hour clock, a 60 minute hour, read your horoscope…

I’m not making a case for evolutionary psychology – I agree with ajay at 72. But, as others have noted, we (humans) can’t just “knock it off”, and we are kidding ourselves in some very harmful ways when we pretend we can. Narrative – social and physical patterns – are the stuff our brains are made of. A surprising number of common patterns have very deep roots, which are VERY hard to re-shape.

The sociologist is in the room to explain to the economists the bits that a model of rational calculation misses. The anthropologist might be helpful in identifying which bits are hard to alter, but also open the debate up to non-obvious alternatives.

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Bill Benzon 02.29.12 at 11:44 pm

. . . and the evolutionary psychologist (“the horror! the horror!”) might argue that the three forms of interaction, communism, hierarchy, and reciprocity, are (somehow) inscribed in human nature.

Think of chess. On the one hand we’ve got the basic rules specifying how you can move the pieces. Think of the the three modes as being like the basic moves of chess pieces. Now, to play a decent game of chess you need to know tactics and strategy, which are above and beyond the basic moves (though consistent with them, of course). So, whatever our economic arrangements, we must construct them of those three basic types of interaction. How do we do the construction?

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dsquared 02.29.12 at 11:45 pm

I vote to keep the anthropologist; I think the question of whether there actually is any stigma and shame knocking around, and if so where it comes from and how it can be designed out, is relevant & non-trivial.

Well in that case, not joking here, should we have a theologian as well?

I’ve just remembered that I once borrowed £500 from a payday lender at an APR of 177% (ie for £520 in 2 weeks’ time). I wanted to go on holiday.

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Henry 03.01.12 at 12:01 am

Kieran is actually doing work with Marion Fourcade on how different forms of credit marketing are an important way in which class divisions and distinctions get reproduced in the US – I saw a presentation of very early results this summer. Abstract:

bq. Abstract: Official and unofficial classes and categories give structure to social settings, provide a basis for social identities and structure the life chances of those who belong to various categories. In this paper we consider some aspects of classification in the market, and in particular the market for consumer credit. The most basic division in a credit market is that of inclusion versus exclusion, i.e., whether one has access to credit at all, but the creditworthy are further subdivided by the kind and degree of credit they may access. The ability to quantify the riskiness of borrowers is vital to the latter process. The law prohibits FICO and similar credit scoring algorithms from incorporating categorical data such as the gender, race, or age the consumer. Instead, classes identified by credit scoring are meant to objectively group consumers by their risk profile, not ascribed status. Nevertheless, we argue that the credit system should be understood as an important channel of social reproduction closely tied up with ascriptive categories. The consumer credit system works both as a leveling force and a condenser of new class categories. Over the past twenty years, the system has both greatly expanded its scope and differentiated internally. The result has been an expansion of credit to lower-income households, a concomitant increase in household debt, but also unexpected and rapid growth in the “fringe banking” sector. The consumer credit market is not structured as a continuous spectrum of consumers graded purely by their risk profile and served by similar financial institutions offering the same array of debt instruments. Instead, “bright line” categories have emerged, such as that dividing prime from subprime borrowers, and that dividing the “banked” from the “unbanked” and users of alternative financial services. Both the consumer and the producer sides of the credit market are thus segmented into classes only partly accounted for by credit risk (on the consumer side) and credit price (on the producer side). Credit providers have sought to differentiate themselves by quality and status, in a manner familiar to economic sociologists. Credit consumers are sensitive to the form of the credit transaction, not just its cost, and this is much less well-understood. We argue for a framework that connects the status ordering of providers with the *habitus* of consumers, by way of attention to the extensive market research and branding efforts of providers, on the one hand, and the tastes of consumers, on the other. This perspective clarifies a variety of apparent oddities and helps make sense of presumed “irrationalities” in consumer choices when it comes to credit.

Perhaps we need a cultural sociologist too …

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Bruce Wilder 03.01.12 at 12:04 am

d2: “The rich don’t always time their consumption to match up to their income, so why should the poor? More or less at any level of income or wealth, people are going to want credit.”

The rich will rarely find themselves paying 400% interest, and, apparently, making the poor desperate is one of those rare opportunities afforded by financial innovation, for “earning” 400% interest as a payday lender. But, if you get enough economists in the room to obscure what’s going on, you can rationalize it before a Royal Commission.

d2: “. . . thinking about it in terms of “debt” being inescapably linked with shame, stigma and misery seems to me to be really quite counterproductive to the design of a sensible regulatory regime.

That’s why you’d make a lousy anthropologist.

Any institutional scheme or framework comes embedded with its own ethics and norms. The ethics and norms are part and parcel of what makes them work as social mechanisms. There’s nothing wrong with trying rationalize an institutional design — to make taboo, say, serve some rational purpose. That’s been a large part of the philosophically liberal agenda since the Enlightenment, but it is hardly equivalent to stripping away all considerations, except the arithmetic. Human beings are naturally driven to try to find not just function, but meaning in their daily strategies for living. If virtue is ascribed to having an account at a benevolent thrift institution, and stigma attaches to dealing with a loan shark, it seems to me that may be all to the good, though the devil, as always, may lurk in the details. That’s why it is handy to have an anthropologist around; unlike the ignoramus economists, they sometimes have genuine insight into these aspects of institutions and institutional design.

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Dan Hardie 03.01.12 at 1:32 am

I think the question is not ‘Do we need an anthropologist around to talk about debt?’- but rather ‘Do we need David Graeber around, with the ideas he sets out in his book?’

And my answer to that one would be an emphatic ‘no’, for much the same reasons that Dsquared sets out above, or that I outlined in comments to Chris Bertram’s post: an assertion, unsupported by convincing evidence, that the history of debt stretching back to the Sumerians is actually relevant to understanding contemporary finance; an assertion, unsupported by convincing evidence, that current financial practice is irrevocably linked to rampant militarism; an apparent belief that the creation of debt by slave-owning states taints it morally (although apparently writing and number, which emerged from the very same states, apparently aren’t so tainted); a hugely simplistic take on modern international political economy (the only thing wrong with Henry Farrell’s essay on this is the author’s possibly excessive tact)… and so on.

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Dan Hardie 03.01.12 at 1:53 am

…Although, catching up with Henry’s comment thread, I see that the extreme tact he used to phrase his criticisms of ‘Debt’ didn’t prevent Graeber from calling him an ‘angry illiterate.’

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dsquared 03.01.12 at 8:09 am

The rich will rarely find themselves paying 400% interest, and, apparently, making the poor desperate is one of those rare opportunities afforded by financial innovation, for “earning” 400% interest as a payday lender

This 400% interest thing is really poorly understood – it’s another consequence of using a scale-free metric (the APR rate) in a context where scale matters.

Say I am the proprietor of Whacky Jack’s Interest Free Credit. As the name above my store says, I don’t charge any interest at all. All that I ask is that you cover my costs in setting up the loan agreement. My costs consist of twenty minutes of the time of my clerk, who I pay $15 an hour. This is the same whatever the term or amount of the loan.

Jim-Bob, who is rich, walks into my store. He wants to borrow $5000 for a year. I ask him to pay me back $5005 in one year’s time. The APR on this transaction is 0.1%

Fatty, who is poor, follows him. Fatty wants to borrow $50 until payday, which is three weeks away. I ask him to pay me back $55 in three weeks’ time. The APR on this transaction is 421.8%.

Fatty isn’t particularly desperate in this example, and I’m not exploiting him – I’m not making any profit at all, let alone a return on my money. What is going on here is that when there is any element of fixed cost at all, borrowing small sums of money is very inefficient, and the mathematics of compounding will blow up this inefficiency to mammoth proportions if you borrow for a short period of time and convert the rate to an APR.

We can do a reality check here and see that payday lenders aren’t “earning” 400% returns, because we know that there are no payday lenders who are richer than Bill Gates. If you started with $1000 and earned a 400% rate of return, you would have $244bn in 12 years’ time.

Note that all calculations are subject to my usual silly spreadsheet errors, but the general shape of things is right.

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sanbikinoraion 03.01.12 at 8:14 am

I must say, DD, you got a fantastic deal at only 177%APR. The going rate for Wonga et al these days is approximately 1% per day, which is going on four THOUSAND percent APR.

Having just finished working at a UK payday lender, I can say that the average customer earns ~£23k, works for the police/NHS, has some bad credit in the history but not too much, is under 30, and is looking to borrow £300 til payday, which will cost them £390 when the day falls.

BUT the huge game with the payday lenders is that they spend a lot of time and effort ringing around all these people the week before payday asking “are you sure you don’t want to roll the debt over til next month?”. They try to roll you over 5-6 times if possible, and if you’re young and a bit financially clueless, deferring payment like that sounds good. I do worry that the net result is the sort of debt peonage people have been pillorying higher up the thread.

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dsquared 03.01.12 at 9:29 am

Actually “payday lender” is wrong thinking about it because that implies an unsecured loan – I borrowed the money from a pawnbroker which is presumably how I managed to get that rate. Apologies if anyone was misled. Having once done the due diligence on the flotation of a chain of pawnshops, I do remember that the clientele are often really quite rich.

Sanbikinoraion is absolutely right that the really crucial bit of regulating consumer credit is the marketing material. Payday lenders often have some really talented direct mail marketers working for them, and when raw sales talent meets the combination of poor ethical standards and lack of common sense that characterises a really bad consumer lender (canonically, Household International in the USA), you can get really bad problems. But dealing with the sales ability of lenders by having a coutneracting shame and social stigma on borrowers seems like a really bad regulatory regime.

The people who really understood consumer finance and payday lending were the sadly defunct leftwing group ACORN. I don’t know who produced their campaign materials but whoever they were, they really knew their stuff.

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Phil 03.01.12 at 9:55 am

Can’t really see the relevance of a theologian unless we’re working from the starting assumption that people interact with things in meaningful ways that aren’t wholly accounted for by utility-maximising rationality and that those meanings are at some level true and important and validated by something beyond our comprehension. I go up to ‘rationality’ and stop; I think how people make sense of things is vitally important, but I don’t think it means anything in any ultimate philosophical sense. At least, if it did, we’d never know. This is why I’m a phenomenologist and not a Christian.

And rolling over credit card debt can land people with a huge disproportion between the original debt and the interest owed, so it’s not hard to see how those 1%/day interest rates could end up being anything but notional. Nobody’s going to get rich like that, but a lot of people are likely to get poorer.

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ajay 03.01.12 at 10:00 am

the average customer earns ~£23k, works for the police/NHS, has some bad credit in the history but not too much, is under 30, and is looking to borrow £300 til payday, which will cost them £390 when the day falls.

All of this is much as I would expect – presumably the very poor don’t borrow from payday lenders because they don’t have paydays? (Even the fact that they tend to work for the police or NHS, ie the public sector: they aren’t borrowing because their grasping bosses are paying them too little to survive on.)

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Alex 03.01.12 at 10:05 am

To be honest, this is where you get into Yglesias-esque tiddling about trying to design regulatory rules that make a theoretical corner case that in practice works ometimes for the nice and safe into a general reality. Much better, I think, to go with rough consensus and running code and keep the buggers scared (which is my new general regulatory principle, btw – near-total, tyrannical discretion and high public access to the regulator).

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Tim Wilkinson 03.01.12 at 10:50 am

I remember I used fairly often quasi-guiltily (furtively would be more accurate) to borrow a few pounds for a few days from the bank for food, tobacco or fares – without asking them first because I thought they might refuse.

As well as a penal interest rate of probably 30% pa, a charge of maybe £35 would be applied – if timed badly, this could put you into unauthorised overdraft the next month too. And this charge could be for any amount of money, for a single day. A tenner for one day would thus be lent at a notional equivalent annual rate (if capitalised daily) of 414 380 957 600 518 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000 000%.

Actually quite often I wouldn’t know beforehand whether I was ‘unauthorisedly borrowing’ anything because I’d write a cheque (or when they still existed, use an offline card transaction) for the dual reasons of delay and (in effect, at the time) unrefusability, without knowing if the first would would be sufficient to pre-empt any need for the second. If I did know, then it would I think technically be an offence, since in around 81 after much contortion the courts, who recognised how important the banks are to society and wouldn’t to apply the law in such a way as to cause problems for them, unconvincingly decided that writing guaranteed cheques without funds to back then was (IIRC) a theft by fraud against the merchant who accepted the cheque.

Anyway the whole process was pretty furtive and stressful, really, and contrasts well with £20 on £500 for a week’s improptu holiday. And I wasn’t even that desparate, didn’t have kids to feed etc. (And knew things would get better, which makes all the difference – this point has some force against the biblical Christ, and would against Orwell, though the latter at least wouldn’t deny it. There’s theology.)

And a few years ago it was found that these fees constituted a big chunk of high street bank profits – around a quarter or so IIRC. The main change as a result of the case is that all the banks changed their near-identical terms in a near-identical way, as befits good oligopolists, so as to stress just how above board, normal, rational and unforced the whole transaction is (and they did this before the case got to court, and had the case decided primarily on the basis of the new specially altered terms, btw, then argued that since the new terms hadn’t really changed anything, the old terms must have been OK too. You have to admire the cheek – esp since the other main strand of argument was that since the banks make so much money from these charges they must be part of the ‘price’ regardless of how the contractual documents might describe them or how the customer apprehends the matter, and thus they didn’t need to be proportionate or fair since rthey must of course have been freely accepted [psst! in pref. to no bank account!] at the outset by the customer rather than being a sneaky way of ambushing people.

Some real but minor changes were made too, but the practice continues, and I think all those adverts for ‘premier’ accounts with various unwanted extras like, aptly enough, free holiday insurance have gone away again, now it looks like free banking for the majority is going to continue being heavily, even if not quite so heavily as before, subsidised by the poor, feckless, stupid, disorganised and ignorant (it is left as an exercise for the reader to guess into which of these categories I fell).

It’s worth noting that this is not only a matter of loans: when the bank decides it doesn’t want to give you an ‘unauthorised’ overdraft, it will often charge a similar fee – for rejected direct debits, returned cheques etc.

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Harald Korneliussen 03.01.12 at 10:59 am

Eli Rabett, are you familiar with Chris Okasaki’s TradeMaximizer, and the Math Trading community in general? It’s an aside, but with modern mathematics and computers, you can realize some things with barter that would have been thought impossible before.

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ajay 03.01.12 at 11:54 am

What is going on here is that when there is any element of fixed cost at all, borrowing small sums of money is very inefficient, and the mathematics of compounding will blow up this inefficiency to mammoth proportions if you borrow for a short period of time and convert the rate to an APR.

…as many microfinance schemes have found – nominal interest rates of 30-70% pa, excluding fees and charges.
http://www.adb.org/Documents/Books/interest-rates-microcredit/Microcredit-Understanding-Dealing.pdf

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Tim Wilkinson 03.01.12 at 12:23 pm

In the case of the banks, unauth O\D fees were always presented as being necessary to cover costs of writing letters, considering, granting etc. unauth ODs, and various other things. They weren’t, not in the case of online transactions since the late 80s or so anyway. Instead the algorithm that generates OD limits actually produces 2 limits – advised asnd unadvised. The latter is the real OD limit which they won’t allow you to go over; the former is of course the one they tell you, and is the threshold for them applying charges – and they love you to go over it, of course.

They get away with it because 1. there is no alternative, 2. people who only occasionally go over, are shocked by the fees and complain (which implies they dpo not feel guilty, perpetually harried, in fear of the bank etc) simply have the fees waived, 3. people buy the idea that ‘if you don’t want to pay the fees you should stay within your limit’ which sounds eminently sensible if you are of the adolescent libertarian-style economist bent, or well-off, or smugly proud of your own financial continence etc.,

It’s an emperor’s new clothes to some extent – people can’t really manage to get that angry or vociferous about being milked in this way, because it’s embarrassing to admit to. In debate it sometimes gets directed at a third party: “how patronising to suppose that people can’t manage their money and need protection”, etc. (Looks like reality has a pro-patronisation bias). The idea that people might be deliberately doing it as a response to need is no go because everyone knows it’s – absolutely, axiomatically, btw – wrong to take money your’e not entitled to.

Similar to “do adverts manipulate you, then?”. This move ends to be complemented by ‘If they’re that stupid, they deserve it” which you hear surprisingly often given that it’s such an openly wankerish thing to say.

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Tim Wilkinson 03.01.12 at 4:26 pm

(Just realised I’m not supposed to be commenting here. Well it’s all v anodyne, factual.)

Just to add that the above-described complex of psychological deviousness was initially arrived at serendipitously, since these fees were initially set up as deterrent to people going into large, genuinely unauthorised, debt (i.e. as penal), then became a good source of profit, then lost their original function.

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Spysander Looner 03.01.12 at 5:54 pm

Responding to DD’s comment above that all economists must believe that bygones are bygones. This is really interesting. I’m not sure if I agree or not. But one observation: In my (empirical, positive rather than normative) corner of economics, we have a joke that “sunk costs count double.” That’s essentially an anthropological observation — that whatever you might say about what rationality requires, in the real world people seem to behave as if bygones are awfully important.

Now, one response might be that since economists can figure that out, we don’t need an anthropologist in the conversation. Perhaps some behavioral economists will do. But another is that if we are going to design rules and policies that work for real people, we need to be talking to people who understand how real people will behave under those rules and policies. And at least in principle, an anthropological viewpoint would be quite useful here. Otherwise, we’re going to design a system that assumes that underwater homeowners will use jingle mail when that’s the economically rational thing to do, only to find millions of people holding on to underwater mortgages because they think it would be wrong to do anything else.

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dsquared 03.01.12 at 6:47 pm

But another is that if we are going to design rules and policies that work for real people, we need to be talking to people who understand how real people will behave under those rules and policies.

This seems to me like an amazing counsel of despair and an absolute invitation to have the rules bent out of all recognition at the behest of political (and, in size, religious) types who want to claim a unique insight into “real people” and what they want. A lot of the reason why I’m still an economist is that I think it’s a profoundly more liberal and respectful way to treat people if you just set up the rules in terms of what will actually work, and then leave them to make their own choices as much as possible[1] if they want to have subjective hangups. If the alternative idea is to impose massive bankruptcy on the whole system (and effectively confiscate people’s savings)[2] at regular intervals because some people think the man in the sky (or equivalent) will be mad at them for making the sensible choice, then I have to say no, we can do better than that.

[1] If anyone wants to ignore the fact that I have specifically written that the marketing of payday loans needs to be tightly regulated, and to attribute to me some view I don’t hold, I am likely to react badly. In related news, Tim Wilkinson, yes you are banned from my threads, and this is your last warning about respecting that ban. It was a punishment for past misbehaviour, not a precaution against future, and although bygones are indeed bygones, I am concerned with the deterrent effect – I am not going to set the precedent that someone can insult me, and then keep commenting as if nothing had happened. I might delete the three posts concerned if I can be bothered to log in as an admin later.

[2] Or impose a huge liability on the taxpayer via the deposit insurance system, same thing.

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Spysander Looner 03.01.12 at 6:58 pm

DD, I’m not sure what argument you think I made that you are disagreeing with. But I don’t think I actually made it.

My only points were that (1) “just set up the rules in terms of what will actually work” requires knowing how people will behave under various alternative rules; (2) homo economicus assumptions may not go very far toward accomplishing (1); and (3) people who are more experienced at observing real people’s behavior may be useful for accomplishing (1). Insofar as people react to their debt by treating it as the product of a web of social linkages rather than as a contract with specified consequences of default, those who have some expertise with the web of social linkages may be helpful in designing the rules surrounding debt (e.g., the bankruptcy rules). I’d still rather have an economist design the rules, but that design should take into account insights about human behavior that an anthropologist may have a comparative advantage in providing.

I don’t _think_ I’m particularly disagreeing with you here, though I’m not sure. I certainly can’t see how the tools of neoclassical economics would be very useful in regulating the marketing of payday loans, absent psychological/sociological/anthropological insights about how marketing works.

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robotslave 03.01.12 at 7:25 pm

…holding on to underwater mortgages because they think it would be wrong to do anything else.

Why is this is so often cited as the reason underwater homeowners aren’t defaulting in higher numbers?

Aeons ago, on the other side of the Real Estate bubble, there was a fair amount of dust kicked up about whether a buyer should look at the property primarily as an investment, or primarily as a place to live (and points to dsquared for pointing out “it is always both, you idiots”).

What happened to that “place to live” side of things? When we look for “irrational,” i.e. non-investment reasons for underwater homeowners hanging on, why is there no discussion of the possibility that these people might really like their houses and neighbors and schools, and be not very impressed with the idea that they could go buy better ones with all the money they’d save in default?

Why on earth is “they are ashamed” an argument that comes before this?

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